US Yield Curve Disinverts as Soft Labor Data Fuels Fed Cut BetsBy Ye Xie and Elizabeth Stanton
September 04, 2024 at 10:32AM EDT(Bloomberg) -- The US two-year note’s yield fell below the 10-year note’s for only the second time since 2022 as weaker-than-anticipated job openings data bolstered wagers on steep interest-rate cuts by the Federal Reserve.
- US Treasuries jumped on Wednesday — led by shorter-maturity notes that are more sensitive to the Fed’s policy — after data showed US job openings fell in July to the lowest since the start of 2021 and layoffs rose.
- That pushed a key segment of the US yield curve to briefly turn positive, an indication to some that the US economy is on the cusp of a downturn.
The so-called disinversion restored, for a moment, the historically normal relationship between two- and 10-year Treasury yields. Longer-dated yields reflect expectations for how the Fed’s rate will affect economic growth and inflation, and inversions have been harbingers of recession.
The latest reading of the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, known as JOLTS, is “very significant” because it “lowers the bar for Fed” to cut 50 basis points at the next meeting, said Earl Davis, head of fixed income at BMO Global Asset Management.
“Once they start with 50, it won’t be one-off. There’s ample room for them to cut.”
Traders have been scouring economic data this year for any clues on the Fed’s rate cutting plans.
- Interest-rate swaps showed traders have fully priced in a quarter-point rate cut at the Fed policy meeting this month — and more than 30% chance of a half-point reduction.
- A total of 107 basis points of easing are expected for the remaining three meetings this year.
- With expectations building for lower borrowing costs,
Treasuries have been rallying.
A Bloomberg index of US government debt just capped a fourth-straight month of gains, the best streak in three years. And those moves have been pushing the yield curve toward a more historically normal status.
Such a trend has been absent for most of the time since the Fed began raising rates in March 2022 — though it was also briefly present on Aug. 5 in a rally unleashed by weak employment data that drove up expectations for rate cuts.
(Updates prices; adds context and comments.)
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