U.S. Treasury yields are falling as bonds anticipate a slowdown in the U.S. economy

By Herbert Lash NEW YORK, Nov 21 (Reuters) – Treasury yields fell slightly on Tuesday as the market awaited minutes from the Federal Reserve’s policy meeting three weeks ago and growing concerns about an economic slowdown leading to a could lead to recession. The two-year Treasury yield, which reflects interest rate expectations, fell 3 basis points to 4.881%, while the benchmark 10-year bond yield fell 1.6 basis points to 4.406%. Economic data early Tuesday was mixed. The Chicago Fed’s National Activity Index fell to -0.49 in October from -0.02 the previous month as all four major categories of indicators used to compile the index declined. But the Philadelphia Fed’s Non-Manufacturing Business Outlook Survey pointed to an overall improvement in business activity, with sales and earnings returning to positive territory for the first time since July. “People are wondering, are we about to slip into a recession? On Nov. 1, no one thought that would be the case,” said Stan Shipley, managing director of macro research at Evercore ISI in New York. “Now the probability of a recession is around 35% to 40% as the market is pricing in. We expect you will slip into recession in the first half of next year.” The Fed releases the minutes of its meeting from October 31 to November 31. 1 meeting at 2:00 p.m. ET (1900 GMT), which is expected to show the Federal Reserve’s “cautious” approach to policy. The word is used when it appears unlikely that policymakers will raise the target interest rate further, but are unwilling to say so because inflation is still well above the Fed’s 2 percent target. According to CME Group’s FedWatch tool, futures have a 29% chance that the Fed will cut its target interest rate, which is currently in a range of 5.25% to 5.5%, at the end of its meeting on March 20, 2024. Rate cut prospects rise to 47% in May. Two-year and 10-year bond yields remained inverted at -47.7 basis points, as the shorter maturity yields more than the longer one. The reversal, which began in July 2022, is considered a harbinger of a longer-term recession. Treasury bonds rallied on data that suggested inflation was easing, easing worries after Fed Chair Jerome Powell warned in late October that the strong U.S. economy could justify tighter financing conditions to curb rising prices. Markets are in a wait-and-see approach to the shortened US holiday week with Thanksgiving on Thursday. The next important economic data will be the unemployment report on December 8th. The Treasury will sell $15 billion of 10-year TIPS at 1:00 p.m. ET (1800 GMT) and $75 billion of 41-day notes on the 30-year at 11:30 a.m Treasury bonds fell 1.2 basis points to 4.563%. The breakeven rate for five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.236%. The 10-year TIPS breakeven rate was most recently at 2.284%, indicating that the market expects inflation to average about 2.3% per year over the next decade. The 5-year U.S. dollar inflation-linked forward swap, seen by some as a better indicator of inflation expectations due to possible distortions from the Fed’s quantitative easing, was last at 2.591%. Nov 21 Tuesday 8:43 am New York / 1443 GMT Price Current Yield % Net Change (bps) Three Month Notes 5.27 5.4161 0.011 Six Month Notes 5.22 5.45 -0.005 Two Year Notes 100-55/256 4.8808 – 0.030 Three-year bond 100-16/256 4.602 -0.031 Five-year bond 102-6/256 4.414 -0.027 Seven-year bond 102-152/256 4.4362 -0.024 10-year bond 100-192/256 4.40 62 – 0.016 20-year bond 100-16/256 bond 4.745 -0.012 30-year bond 103-8/256 4.5634 -0.012 (Reporting by Herbert Lash; Editing by Will Dunham)