U.S. government bonds rose as traders reduced their bets on the Fed’s tightening policy


US government bonds rose on Tuesday, pushing 10-year Treasury yields to their lowest level in four months as investors lifted their bets on tightening monetary policy and responded to disappointing service industry surveys.

The benchmark 10-year Treasury bond yield fell 0.06 percentage points to 1.36%, the lowest level since the end of February, when concerns about a rapid rise in inflation began to reverberate in financial markets.

The 10-year Treasury bond yield is inversely proportional to the price trend, soaring to 1.77% earlier this year, as investors began to expect the Fed to take a more active response to curb rising inflation.

Tuesday’s trend added impetus to the long-term U.S. Treasury bond rebound that began on Friday, when government data showed that U.S. hiring was accelerating, but not enough to prompt the central bank to change policy. The Fed’s ultra-loose monetary policy, including historically low interest rates and large-scale bond purchase programs, has been a key factor in keeping borrowing costs low and raising other asset prices.

New data released on Tuesday by the Institute for Supply Management, which tracks activity in the service industry, exacerbated the impact on government debt, which tends to perform well in times of increasing uncertainty. Data show that the business and employment situation in the service industry in June weakened compared to the previous month. ISM cited company comments that it was difficult to find qualified candidates to fill vacant positions.

Ian Lyngen, interest rate strategist at BMO Capital Markets, said: “The ISM data just adds more momentum to the U.S. Treasury yields to continue to fall.” “A large part of what we are seeing is a surrender of higher interest rate theory.”

The country’s market indicators of expected future inflation also fell on Tuesday, and the so-called 10-year breakeven ratio fell to 2.32%. As traders switch to bonds, the yields of other long-term Treasury bonds (including 20-year and 30-year Treasury bonds) have also declined. The fall pushed the yield differential between the policy-sensitive two-year Treasury bond and the 10-year Treasury bond to its lowest level since February.

These moves hit the $50 trillion U.S. stock market, where the stock prices of large industrial products companies, oil giants, and large banks fell. These three sectors have been boosted by expectations of faster growth this year, and large banks have also risen as investors bet that higher interest rates will help increase earnings. The benchmark S&P 500 index fell 0.7%.

Andrew Brenner, head of international fixed income at National Alliance Securities, said: “As the stock market has been hit hard, the U.S. Treasury market is under bidding.”

Investors turned to large technology groups such as Apple and Oracle, which thrived during the pandemic and were considered less sensitive to economic fluctuations. This will help keep the Nasdaq Composite Index’s decline at a modest 0.1%.

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