US Treasury yields fall on weak data and PMI contraction

• US 10-year Treasury yield falls eight basis points sponsored by weak US economic data.
• FOMC minutes note economic slowdown, open door for rate cuts if inflation approaches 2% target.
• Significant ISM Services PMI drop to 48.8, and a decrease in ADP Employment Change pushed yields down.
• Initial Jobless Claims increase to 238K, exceeding forecasts and previous readings.

US Treasury bond yields sank on Wednesday after data from the United States increased the chances of the Federal Reserve easing policy as soon as September, according to the CME FedWatch Tool. Labor market data and weak Services PMI drove the US bonds rally and weighed on yields. The US 10-year benchmark note rate dropped almost eight basis points on Wednesday, down to 4.355%.

US 10-year benchmark note rate tanks amid rising expectations of a September rate cut following weak data

The latest FOMC minutes revealed that officials acknowledged the economy seems to be slowing, yet stated that if the disinflation process stalls, they would not hesitate to raise the fed funds rate. Policymakers added that the current policy is restrictive and mentioned they could ease policy once they're confident that inflation is headed toward its 2% goal.

In terms of data, US business activity in the services sector contracted after reaching its highest level since August 2023, according to the Institute for Supply Management (ISM). The ISM Services PMI for June dropped sharply to 48.8, its lowest since May 2020 and the fastest decline in four years, signaling recessionary conditions

This, along with a weaker ADP Employment Change report for June coming at 150K and missing estimates and the previous month’s data, could be a prelude to Friday’s Nonfarm Payroll numbers. Meanwhile, Initial Jobless Claims for the week ending June 29 rose to 238K, surpassing estimates of 235K and the previous reading of 234K.

According to the CME FedWatch Tool, odds for a 25-basis-point Fed rate cut in September are at 66%, up from 63% on Tuesday. Data from the Chicago Board of Trade (CBOT) shows that traders expect 38 basis points (bps) of easing, according to December’s 2024 fed funds rate futures contract.