Treasury Yields Fall as Weak Chinese Trade Data Raises Concerns

Treasury yields experienced a decline on Tuesday as weak trade data from China raised concerns about global economic growth. This development led to an increase in the buying of sovereign bonds.

Key Highlights

  • The yield on the 2-year Treasury (BX:TMUBMUSD02Y) dropped by 3.8 basis points to 4.733%. It’s important to note that yields move inversely to prices.
  • The yield on the 10-year Treasury (BX:TMUBMUSD10Y) retreated by 9 basis points to 4.002%.
  • The yield on the 30-year Treasury (BX:TMUBMUSD30Y) experienced a significant decline of 10.4 basis points, settling at 4.1%.

Factors Driving Market Movement

The recent news regarding China’s significant decrease in exports during July, which marked the biggest decline since the start of the COVID-19 pandemic in February 2022, has amplified concerns about a potential global economic slowdown. Consequently, this has prompted investors to seek refuge in government bonds.

Apart from the Chinese trade data, there are other events and factors influencing the market:

  • The release of U.S. economic updates, including the U.S. trade balance for June at 8:30 a.m. and the June wholesale inventories report at 10 a.m. (Eastern Time).
  • Various speeches from representatives of the Federal Reserve, such as Philadelphia Fed President Harker at 8:15 a.m. and Richmond Fed President Barkin at 8:30 a.m.
  • Anticipation is building around the release of the July consumer prices report on Thursday, which will play a crucial role in determining whether the Fed will continue with its current monetary tightening approach.
  • The market is currently pricing in an 86% probability that the Fed will maintain interest rates in the range of 5.25% to 5.50% after the next meeting on September 20, according to the CME FedWatch tool.

The Outlook for Interest Rates and Treasury Auctions

According to 30-day Fed Funds futures, the chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the upcoming November meeting is currently priced at 29%. This suggests that the central bank is not expected to lower its Fed funds rate target to around 5% until May 2024.

Meanwhile, the Treasury is set to auction $42 billion of 3-year notes at 1 p.m. This auction will be closely monitored by traders, as it will provide insights on how easily the market can absorb the $103 billion of sales planned for this week. These sales are just a fraction of the government’s larger plan to raise $1 trillion in the third quarter.

Analysts’ Views

The sudden and significant sell-off in U.S. rates markets last week caught many investors off-guard, as per UBS. However, what proved to be even more surprising was the behavior of the yield curve.

According to Solita Marcelli, the chief investment officer Americas at UBS Global Wealth Management, “While we were expecting a steeper yield curve in the second half of 2023, we believe that most of the recent movement is a knee-jerk reaction to the unforeseen increase in supply. The 2-year/10-year curve has steepened by nearly 35bps in the past two weeks to reach -71bps. However, given our expectation for rates to remain ‘higher for longer,’ we do not anticipate an upward-sloping yield curve until 2024. We continue to anticipate slower growth in the latter half of 2023, which will likely result in lower 10-year yields of around 3.5% by year-end.”

As the market continues to adapt to changing interest rate expectations and digest the government’s sizeable fundraising efforts, investors and analysts will remain cautious and closely observe the movements in rates and auctions for further insights.

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