US Treasury yields plummeted to their lowest level in nearly a week as investors anxiously awaited the release of manufacturing data that could signal the possibility of further interest rate cuts by the Federal Reserve. Longer-dated bonds led the market higher after benign inflation data on Friday hinted at a potential rate cut later this year.
Next, investors will closely monitor the manufacturing PMI and ISM manufacturing reading to gauge the strength of the world’s largest economy. Michael Kushma, CIO Global Fixed Income at Morgan Stanley Investment Management, said that investors are eagerly waiting for positive news that could help them rally as they await key economic indicators that will influence the Fed’s decision on rate cuts.
The bond market posted a gain in May, its second of the year, and its largest since December. This pushed the 10-year Treasury yield around 20 basis points lower last month on indications of a weakening job market and easing inflation. Yields on 10-year Treasuries dropped for a third consecutive day, reaching as low as 4.46%, the lowest since May 28. The two-year yield remained relatively stable at 4.87%. European bonds also saw gains as manufacturing PMI data in the region was slightly below expectations.
Investors will closely watch US data on May payrolls due on Friday to gauge the economic outlook ahead of the Fed’s policy meeting on June 12. Richard McGuire, head of rates strategy at Rabobank, said that expectations for Fed rate cuts are becoming more positive, helping Treasuries continue their gains from the previous week. Overnight index swaps contracts indicate a quarter-point rate cut fully priced in for December, with the likelihood of a move as soon as September increasing to around 50%. Contracts through the end of the year imply a total of 36 basis points of rate reductions, up slightly from
