Treasury yields fall further after Ackman and Gross question health of U.S. economy

The 10-year yield has shed nearly 20 basis points since hitting a 16-year high of 5.02% about 24 hours ago.

Both Bills indicated Monday that interest rates may likely fall because the U.S. economy was less healthy than some recent headline data suggested. There has been a slight shift in the expected trajectory of Federal Reserve policy.

Markets are pricing in a 98.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.

But the chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is now priced at 24%, down from 38.5% a week ago.

And the central bank is now expected to take its Fed funds rate target back down to around 5% by August 2024, according to 30-day Fed Funds futures. A few weeks ago that level was not expected to be reached until October.

U.S. economic updates set for release on Tuesday include the S&P flash services and manufacturing PMIs for October, due at 9:45 a.m. Eastern.

The Treasury will auction $51 billion of 2-year notes at 1 p.m.

What are analysts saying

“With a plethora of communications last week, the Fed sent a consistent message from policymakers across the hawk/dove spectrum that it is necessary to factor in the recent rise in long-end yields and its impact on financial conditions when setting monetary policy, suggesting that the Fed is very likely to keep rates steady at next week’s meeting,” said Deutsche Bank economists led by Amy Yang.

“As the minutes to the September meeting showed, regardless of what officials feel about the need for further rate hikes, they seem more united on the need for rates to stay high ‘for some time’,” they added.