Short-term Treasury yields fell sharply on Wednesday after a soft reading in the private-sector payrolls report heightened expectations for the Federal Reserve to embark on rate cuts this year.
What are Treasurys doing?
The 2-year Treasury note yield TMUBMUSD02Y, -5.15% sensitive to shifting expectations for Fed interest-rate policy, plunged 9 basis points to 1.783%, carving out a fresh 18-month low. The 10-year note yield TMUBMUSD10Y, -2.27% fell by a more muted 3.3 basis points to 2.088%, while the 30-year bond yield TMUBMUSD30Y, -0.39% was mostly unchanged at 2.606%.
The gap between the 3-month bill yield TMUBMUSD03M, -0.12% and the 10-year note yield stood at a negative 25 basis points. A deep inversion along that measure of the yield curve’s slope has historically often preceded a recession.
What’s driving markets?
Advanced Data Processing reported private-sector employers added 27,000 jobs in May from 275,000 in April, falling short of analyst’s forecasts for a 185,000 reading last month. Though, the ADP report has had a poor track record of predicting the more widely-watched official jobs report later on Friday, the extent of its drop could deal a harsh blow to optimistic analysts who have looked at low unemployment rates and healthy job gains as a sign that the U.S. expansion is still on track to reach its longest span in post-war history.
See: ADP private-sector job growth tumbles to a 9-year low in May
Fears that the U.S. economy is at the brink of a slowdown, in part because of the yield curve’s inversion, have helped push bond yields lower. In particular, short-term yields have fallen sharply as bond investors increasingly expect the central bank to ease monetary policy.
In other economic data, The Institute for Supply Management will release its non-manufacturing gauge for May at 10 a.m. The services sector has held up better than manufacturing in the face of growing concerns about the impact of President Trump’s tariffs. The U.S. central bank will also release the Beige Book at 2 p.m., a collection of anecdotes highlighting business conditions across the country.
What did market participants say?
“Today’s news doesn’t bode well for the monthly payroll jobs report on Friday and despite our better judgment we are lowering our payroll jobs number this Friday to 120K, where we had thought 200K was possible, as the trade tariff chickens come home to roost for the US economy,” wrote Chris Rupkey, chief financial economist for MUFG.
What else is on investors’ radar?
Senior Fed officials are set to speak throughout the day Wednesday. Atlanta Fed President Raphael Bostic and Fed Vice Chairman Richard Clarida will appear at 9:45 a.m., followed by Boston Fed President Eric Rosengren at 1:15 p.m.
Key members of the U.S. central bank’s rate-setting committee including Fed Chairman Jerome Powell appeared to open the door to lower rates on Tuesday if the uncertainty around the global trade war clouded and hurt the economic outlook.
But Dallas Fed President Robert Kaplan said in an interview with Bloomberg Television early Wednesday that it was too soon to call for a cut to interest rates, and said he still wanted monetary policy to stay patient for now.
See: Powell suggests interest rates could be cut if trade tensions damage economic outlook
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