US two-year Treasuries at lowest yields since August 2022

Short-dated Treasury yields approached their lowest levels of the year Tuesday after a gauge of consumer confidence slumped, adding to the case for another half-point interest-rate cut at the Federal Reserve’s next meeting.

Two-year note yields declined despite an auction of those securities. The $69 billion sale drew the expected yield of 3.520%, the lowest for a two-year note auction since August 2022. Outside of an auction, the lowest two-year yield this year was 3.524%, reached Sept. 16. The auction result suggests that when the new notes acquire benchmark status on Wednesday, they may carry even lower yields.

Late in New York the two-year was 5 basis points lower at 3.534%, near the session lows. 

“The solid reception to the two-year auction, effectively at the highs of the day, reinforced the ongoing demand for the front-end of the curve,” Ian Lyngen, head of US rates strategy at BMO Capital Markets, said in a note.

Swap contracts for predicting future Fed moves fully priced in both a half-point and a quarter-point move over this year’s two remaining policy meetings — and 50% odds it will come in November — after the Conference Board’s consumer confidence gauge for September unexpectedly fell.

Lyngen said, “It remains to be seen, and confirmed by the data, but 50 basis points might be the new 25 basis points,  at least for the first several moves of the cycle.”

Longer-term yields were underpinned by commodity price gains unleashed by China’s package of economic stimulus measures.

“The Fed is easing policy and you would expect to see the yield curve steepen as short-end rates fall,” Rob Waldner, head of macro research at Invesco, told Bloomberg Television. He said Invesco has a “tactical short on 10-year notes” and is looking for “slightly higher yields.” 

Longer-maturity yields were little changed to slightly higher on the day after the consumer confidence reading sparked a pullback from the day’s highs. China’s economic stimulus measures drove gains for crude oil and other commodities that helped push longer-term yields higher to compensate for higher inflation risk.

The 10-year yield briefly exceeded the two-year by 20 basis points, the widest margin since mid-2022. For most of the past two years, during which the Fed was raising rates, the two-year yield was the higher one. The Fed cut interest rates last week for the first time in years, by half a percentage point to a range of 4.75%-5%.

Fed Governor Michelle Bowman, who dissented from last week’s rate cut decision in favor of a smaller move, in a speech Tuesday reiterated explanatory comments she made last week. Inflation risk persists, particularly as the job market remains strong, she said. 

Fed policy makers have signaled they expect to cut rates further over the coming year — to around 3.4% by the end of 2025. That’s helping keep a lid on shorter-dated yields ahead of this week’s auctions, which also include five- and seven-year note sales over the next two days.