US yields firmer ahead of Powell’s remarks; rates downtrend intact

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U.S. jobless claims rise in latest week
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U.S. business activity index falls to four-month low
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U.S. existing home sales rise more than expected
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Fed funds futures pricing in 100 bps of cuts this year
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By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 22 (Reuters) – U.S. Treasury yields on Thursday recovered from two-week lows hit the previous session, in line with gains in the European bond market, as investors took a breather buying government debt ahead of a speech from Federal Reserve Chair Jerome Powell on Friday at a central bank event in Jackson Hole, Wyoming.
Analysts said the downward trend in rates remained intact despite Thursday’s upward move.
U.S. data led by jobless claims and the S&P Global’s business activity index continued to show a slowing economy that backs expectations the Fed will start cutting interest rates next month. The data, including recent economic reports, however, do not suggest a recession is on the horizon.
Thursday’s Fed speakers also alluded to a rate cut in September.
“I think Powell and what he’s supposed to say have been pretty well priced in given that we got the minutes yesterday that were pretty dovish. It would take a very hawkish statement from Powell to turn sentiment around and that is quite unlikely,” said Stan Shipley, fixed income strategist, at Evercore ISI in New York.
“That said, economic data were not terrible. Inflation is low and the Fed is going to start to ease many times over the next two years. We think they will go three times this year and several times next year.”
The fed funds futures market has fully priced in easing at the September meeting, with a 76% chance of a 25 basis-point (bp) cut, according to LSEG calculations. Traders have also priced in about 100 bps of cuts by the end of the year.
In afternoon trading, the benchmark 10-year yield rose 8.6 bps to 3.861%.
U.S. Treasury yields have been tracking those on euro zone bonds, which were higher on the day after survey data showed the bloc’s services sector fared better than expected in August.
U.S. 30-year yields climbed 8.3 bps to 4.134%.
On the short end of the curve, the two-year yield, which reflects rate expectations, advanced 8.6 bps to 4.009% .
SLOWING US ECONOMY
Yields held gains after data showed a modestly slowing labor market, with jobless claims rising 4,000 to a seasonally adjusted 232,000 for the week ended Aug. 17. Economists polled by Reuters had forecast 230,000 claims.
U.S. business activity also eased, falling to a four-month low in August. S&P Global’s flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, edged down to 54.1 this month, a still-healthy level among the highest measured over the past two years. That followed a final reading of 54.3 in July.
The only report on Thursday that showed expansion was housing. U.S. existing home sales rose more than expected in July, reversing four consecutive monthly declines. Home sales rose 1.3% last month to a seasonally adjusted annual rate of 3.95 million units, data showed. Economists polled by Reuters had forecast home resales rising to a rate of 3.93 million units.
Aside from the data, Fed officials flagged a rate cut next month. Boston Fed President Susan Collins said the Fed should move “soon.” Philadelphia Fed President Patrick Harker also said he was on board with a September cut as long as the data performs as he expects it to.
Also on Thursday, the U.S. Treasury’s auction of $8 billion in 30-year Treasury Inflation-Protected Securities (TIPS) was poorly received. The auction picked up a high yield of 2.055%, higher than the expected rate of 2.045% at the bid deadline, suggesting investors sought a premium to purchase the bond. The last three 30-year TIPS auctions were also soft, tailing or overshooting the rate forecasts by an average of 1.6 bps.
The auction’s high yield on Thursday was 14.5 lower than the 2.200% rate from the 30-year TIPS’ February new issue.
Post-auction, U.S. 30-year TIPS yield was last up 5.6 bps at 2.019%.
(Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis and Marguerita Choy)