(Bloomberg) -- US Treasuries pared Monday’s early losses, with sentiment boosted late in New York after a key Federal Reserve official left the door open to more easing later this month.
Traders began an important week of economic data on the defensive and yields peaked for the session ahead of data that showed ISM manufacturing activity beating forecasts, but with the prices component coming in weaker than expected.
The five-year yield rose as much as 9 basis points to near 4.14%, clipping some of the bond market’s late-November rally. The five-year tumbled 25 basis points last week and was below 4.08% late in New York.
As the market retraced early losses, longer-dated benchmarks outperformed the front end and that briefly pushed the 10-year yield below the two-year rate, inverting the curve in traders’ parlance.
The mood shifted when Fed Governor Christopher Waller said he was looking at “supporting a cut to the policy rate at our December meeting,” in prepared remarks.
Those remarks boosted the front end, sending the two-year yield to a session low of around 4.17% and spurred traders to price in around 17 basis points of easing for swaps covering the Dec. 18 policy meeting, equating to about 70% odds of a quarter-percentage point cut, and up from 60% earlier.
Atlanta Fed President Raphael Bostic said earlier on Monday that he’s undecided on whether a rate cut is needed this month, while Waller also said a cut in December “will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.”
The central bank has already trimmed policy by three-quarters of a point to a range of 4.5% to 4.75%, and market pricing for the meetings ahead will hinge on the tone of this week’s labor elements in the manufacturing and services reports, along with Jolts job openings due Tuesday, and ADP private sector hiring on Wednesday.
“The question for every investor with valuations here,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities, is whether a combination of “strong growth, inflation contained to some prices lower, good private sector jobs, and lower rates,” can prevail.
Pause Foreseen
Traders expect the Fed will likely pause in cutting rates early next year, with 36 basis points of total easing priced into the three meetings through March. The decisions early next year come against the backdrop of the incoming Trump administration, which is seeking stronger economic growth via tax cuts and deregulation, alongside higher tariffs that are seen as inflationary.
Patricia Zobel, head of macro and economic research at Guggenheim Investments, said she’s focused on Fed officials’ updated rates projections that come out later this month.
“There’s a lot of uncertainty about the appropriate setting of monetary policy and that includes on neutral,” said Zobel, who previously worked for over 20 years at the New York Fed in the markets group.
A heavy slate of corporate bond offerings contributed to the initial jump in yields Monday, while reports that last month’s cease-fire between Israel and Hezbollah was fracturing helped spur the reversal, traders said.
Still on the radar for traders are speeches to come later from New York Fed President John Williams, with Chair Jerome Powell speaking Wednesday. The the week will culminate with the November jobs report Friday.
The greenback got a boost from the higher Treasury yields, and then trimmed gains later in the session with the Bloomberg Dollar Spot Index gaining 0.4%. In Europe, the spread on French debt over its German peers jumped amid ongoing concern that the French government may be toppled.
“We are going to watch a slow-moving locomotive crash shortly in Europe, as sovereign risk gets repriced as French politics explodes,” said John Brady, managing director at RJ O’Brien.
(Adds Waller remarks, updates prices.)
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