Treasuries rose sharply amid recessionary fears, due to data showing a contraction in business activity for the first time since 2020.
The decline in bond yields accelerated on Friday, as the weak economic data led to increased betting on the Fed dialing back to a half-point hike in September after what will almost certainly be a 75 basis point hike in July. The 10-year yield fell below 2.8%.
Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities said, “There is no denying that the economy is decelerating. If it continues, there is a prospect that the Fed pulls back its pace of tightening once it goes 75 next week.”
The Fed has been trying to cool the economy and reduce demand in an effort to reduce inflation, which was at record highs. Assuming the Fed delivers another 75 basis point hike for June, the combined 150 basis point hike over the last two meetings would be the steepest rise in interest rates since the early 1980’s.
Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co. said in an interview that “the right thing to do” is to have strong cash levels and exploit higher relative rates in the front end of global curves.
This bond market rally has been marked by large block trades in 5 and 10 year futures, indicating investors who see a stalling economy are taking up long positions in these parts of the Treasury curve.
After an initial strong reaction to the data Friday, Treasury yields drifted back from session lows. The 10-year Treasury rate fell 12 basis points, to 2.75%, after briefly touching 2.73%.
Faranello noted, “The 10-year yield will face a challenge breaking below the 2.72%-to-2.75% band, but should that transpire, the market can push toward 2.5%.”
The Treasury yields still were dwarfed by the declines seen in eurozone debt rates. As the current data points toward Europe heading to recession, investors are making bets on hikes this year and the next. On Friday, German two-year yields fell as far as 31 basis points to 0.37%.
