US 10-year yield sinks below 4% as investors pile into rate cut bets

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US Treasury yields sank to their lowest level in six months on Thursday as weak economic data spurred traders to double down on bets that the Federal Reserve will deliver a series of interest rate cuts this year.

Bonds had already rallied in the wake of Wednesday’s decision by the Fed to keep rates at a 23-year high, as chair Jay Powell signalled that the central bank could finally start lowering borrowing costs next month.

They extended gains on Thursday as the latest signs of a slowing jobs market cemented expectations for three quarter-point rate cuts by the end of the year. The benchmark 10-year Treasury yield fell 0.13 percentage points to 3.98 per cent, below 4 per cent for the first time since early February.

Two-year yields, which closely track interest rate expectations, fell 0.15 percentage points to 4.19 per cent. Yields fall as prices rise.

“The data is moving south and that is calling into question . . . whether we may be looking at lower long-term interest rates,” said Robert Tipp, chief investment strategist at PGIM Fixed Income. Markets were now pricing in some chance of an extra-large half-point rate cut later in the year, Tipp added.

The moves came as figures published on Thursday showed new applications for unemployment aid, a proxy for job cuts, at their highest level since last August. Separate data showed the fourth consecutive month of contraction in manufacturing, as well as a sharp downturn in employment in the sector.

Those figures, which come ahead of the crucial US jobs report on Friday, “will add to concerns that the Fed has left it too late to begin loosening policy”, said Thomas Ryan, North America economist at Capital Economics.

Soaring tensions in the Middle East following the assassination of Hamas’s political leader in Tehran and a senior commander of Hizbollah in Beirut have further boosted Treasuries, which are a haven for investors, according to analysts.

“The move is a combination of a dovish Fed, softer data, as well as some geopolitical risk . . . There is a fear that the situation in the Middle East [will] expand and worsen,” said Gennadiy Goldberg, head of US rates strategy at TD Securities.

Despite warning about a weakening labour market, Fed officials on Wednesday indicated they would need “greater confidence” that inflation was falling before they were willing to cut rates. Some analysts said that bond investors were ignoring that cautious message from the central bank.

“Everything we heard from Powell yesterday was calm and collected,” said Blake Gwinn, head of US rates strategy at RBC Capital Markets. “I think the market is getting carried away with the data this morning.”