US Treasury yields approach two-month lows amid accumulating signs of an economic slowdown

U.S. Treasury yields neared their lowest in two months on Thursday following a report that indicated a larger-than-anticipated rise in weekly jobless claims. This development strengthens the belief that the Federal Reserve may not be inclined to increase interest rates further to temper inflation.

The Labor Department reported an increase in claims for state unemployment benefits by 13,000, reaching a seasonally adjusted figure of 231,000 for the week ending November 11. This number surpassed the 220,000 claims anticipated by analysts.

The softening of the labor market is perceived as beneficial for the Federal Reserve’s efforts to control inflation, as it could lead to reduced consumer spending.

The combination of a decelerating job market and consumer inflation data that did not meet expectations earlier in the week has led market participants to adjust their expectations regarding the Federal Reserve’s next steps. Futures markets now almost unanimously anticipate that the Fed will maintain the current interest rates at the upcoming December 12-13 meeting.

Market sentiment also reflects a growing belief that the Federal Reserve may start to reduce rates by March of the following year.

Homebuilder confidence in the U.S. has also seen a decline, with the National Association of Homebuilders’ confidence index dropping to its lowest point since December 2022.

Bill Adams, chief economist at Comerica Bank, suggests that as the economy’s growth pace moderates, the unemployment rate may rise above 4%, prompting the Federal Reserve to balance its dual mandate of price stability and maximum employment, potentially leading to a rate cut by mid-2024.

The 10-year Treasury note yield fell 8.4 basis points to 4.453%, just above its two-month low. Similarly, the 30-year Treasury bond yield decreased by 5.9 basis points to 4.633%.

The decline in the 10-year yield, which has dropped almost 60 basis points since reaching a 16-year peak in mid-October, is attributed to reduced concerns over Treasury supply and increasing worries about consumer spending strength.

This decrease in yields is often interpreted as increased investor interest in safe assets, coinciding with a significant drop in oil prices to their lowest since July.

Market analysts project that the 10-year yield may decrease to 4% within the next year.

Jamie Cox of Harris Financial Group comments on the delayed impact of monetary policy on various economic sectors, noting a shift in focus from inflation control to sustaining economic growth and preventing a recession.

The two-year U.S. Treasury yield, which is generally reflective of interest rate expectations, also decreased by 7.4 basis points to 4.842%.