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Bond Report: 2-year Treasury yield falls to lowest since July 2016 as traders ramp up rate-cut bets

Short-dated Treasury yields fall sharply on Wednesday on expectation of further easing by the Federal Reserve, only a day after the U.S. central bank carried out a surprise 50 basis point rate cut Tuesday. Read More...

Short-dated Treasury yields fell sharply Wednesday on expectations of further easing by the Federal Reserve, only a day after the U.S. central bank carried out a surprise 50-basis-point rate cut.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +4.27%  fell 1.1 basis points to 0.994%, a day after the benchmark maturity made a historic slide blow the 1% threshold. The 30-year bond yield TMUBMUSD30Y, +4.47%  was up 1.4 basis points to 1.636%.

Much of the market action revolved around the two-year note rate TMUBMUSD02Y, -4.05%  , which is sensitive to how investors expect interest rates to move. The short-dated maturity fell to 0.630%, its lowest since July 2016.

What’s driving Treasurys?

The Fed cut its policy interest rate Tuesday ahead of its scheduled policy meeting in two weeks, with the Bank of Canada also cutting its interest rate by 50 basis points on Wednesday. The expectation now is for other monetary policymakers at the Bank of England and the European Central Bank to follow suit and ease policy, too.

Some investors are still betting on the Fed to cut rates again when the Fed formally meets on March 17-18. But St. Louis Fed President James Bullard suggested the central bank was content with where they had set interest rates on Tuesday, and appeared to downplay expectations for additional easing at this month’s meeting.

Moves by the Fed and the Bank of Canada followed a conference call by G-7 finance ministers and central bank governors Tuesday that pledged measures to shore up global economic growth in the face of the COVID-19 epidemic emanating from China. The World Bank and the IMF has pledged billions of dollars to countries to offset the economic damage expected from the virus.

A total of 93,455 cases of the COVID-19 virus have been reported worldwide with at least 3,198 deaths, according to the latest figures from Johns Hopkins Whiting School of Engineering’s Centers for Systems Science and Engineering.

In U.S. economic data, Automatic Data Processing reported private-sector employers added 183,000 jobs last month. Meanwhile, the Institute for Supply Management reported its nonmanufacturing gauge in February rose to 57.3% from 55.5% in the previous month.

The Fed’s Beige Book, a collection of anecdotes from businesses across the U.S., showed the coronavirus was starting to make a dent on the domestic economy and supply chains.

What did market participants say?

“With the Fed having eased yesterday, we’re priced pretty aggressively for the March meeting. I’m not convinced the Fed is going to cut at the upcoming meeting, so it will be important to see what the Fed says in the coming days. If they make it clear the cuts are one and done, we could see yields back up a bit,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities, in an interview.

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