Yields rebound on Goolsbee comments, solid services sector data

By Karen Brettell

NEW YORK (Reuters) -U.S. Treasury yields rebounded from one-year lows on Monday after a Federal Reserve official said weaker than expected jobs data for July does not indicate a recession, while solid U.S. services sector activity eased some fears that the United States is heading into an economic downturn.

A closely watched part of the Treasury yield curve also turned negative again, after briefly trading in positive territory for the first time in two years.

An unexpected increase in the employment rate and fewer than expected job gains in July’s employment report on Friday sparked fears over a fast approaching economic downturn and caused a rapid repricing of expectations on when and how far the U.S. central bank will cut interest rates.

But Chicago Fed President Austan Goolsbee said on Monday the data does not indicate a recession, while noting that Fed policymakers must carefully monitor changes in the U.S. economy to avoid being too restrictive with interest rates.

Goolsbee is “notably the most dovish member for quite some time at the Fed and he didn’t suggest that there was any real alarm,” said James Knightley, Chief International Economist, US at ING.

U.S. services sector activity also rebounded from a four-year low in July amid a bounce back in new orders and the first increase in employment in six months.

“The ISM services report was pretty good,” said Knightley. “We’re starting to see a little bit of calm return and a little bit of stability return” to the market.

Traders are now pricing in an 84% chance the Fed will cut rates by 50 basis points at its next scheduled policy meeting in September. That was fully priced in earlier on Monday, with a 75 basis point cut also seen possible, according to the CME Group’s (NASDAQ:) FedWatch Tool.

Traders had also begun positioning for a possible emergency rate cut before September.

Yields on interest rate sensitive two-year notes were last up 7.3 basis points at 3.944%, after earlier getting as low as 3.654%, the lowest since April 2023.

Benchmark 10-year note yields rose 2 basis points to 3.817% and reached 3.667%, the lowest since June 2023.

The gap between two- and was last at minus 13 basis points, after earlier reaching 1.50 basis points. It is the first time it has turned positive since July 2022.

An inversion in this part of the yield curve typically indicates that a recession is likely in the next one-to-two years, though this inversion has lasted longer than in previous episodes.

The curve usually turns positive before a downturn begins.

TUMBLING STOCKS, GEOPOLITICAL CONCERNS ADD BID FOR BONDS

Tumbling stock markets globally and concerns about increasing geopolitical tensions in the Middle East have added to demand for safe haven U.S. government debt in recent days.

U.S. stocks have also been hurt by some recent weak earnings outlooks and stretched valuations.

“The move over the last two days in particular, that’s not as much driven by fundamentals as it is by the correction in U.S. equity markets,” said Michael Weidner, co-head of global fixed income at Lazard (NYSE:) Asset Management.

Traders unwinding popular trades in which they sold the Japanese yen and bought U.S. assets has also increased fears of large portfolio liquidations across asset classes.

Upcoming inflation releases and the jobs report for August will be key to whether the Fed makes a larger cut in September, assuming it doesn’t act before then.

“It depends on the August payroll number, if it’s similarly weak (to July) then there’s a good case for a bigger cut,” said Jim Caron, CIO, cross-asset solutions at Morgan Stanley Investment Management.