Tag: Treasury Yields

Treasury Yields Slide Sharply as Market Bets Heavily on September Fed Rate Cut

Posted on by slightbourne@noblecapitalmarkets.com

U.S. Treasury yields fell significantly on Wednesday as soft economic data increased expectations for the Federal Reserve to cut interest rates by September. The decline was driven by weaker reports on private-sector job growth and a contraction in service-sector activity, leading traders to price in a more aggressive pace of monetary easing.

Yields across the curve, particularly from the 2-year to the 10-year notes, dropped to their lowest levels since early May. The benchmark 10-year yield declined to 4.35%, highlighting the bond market’s strong reaction to signs of slowing economic momentum.

The first catalyst came from the ADP employment report, which showed the slowest pace of job creation in two years. That was followed by the Institute for Supply Management’s services index, which signaled contraction for the first time in nearly a year. Together, these indicators pointed to a potential softening in the labor market and raised concerns about overall economic resilience.

Market participants increased their bets that the Fed could start cutting rates as early as September, with the probability of a move rising to around 95%, up from just over 80% the day before. Additionally, expectations for two rate cuts by the end of 2025—likely in October and December—also gained traction.

Adding to the market’s reaction was a sharp decline in oil prices, spurred by indications that Saudi Arabia may be open to increasing oil production. Falling energy prices helped reinforce the idea that inflation pressures could be easing, giving the Fed more room to support the economy with lower interest rates.

Despite these signals, not all data pointed to weakness. A separate government report released Tuesday showed that job openings increased in April, and hiring also improved. Furthermore, within the ISM services report, the employment component showed unexpected strength, and the prices paid index rose to its highest level since late 2022. These mixed signals reflect the complexity of the current economic environment and suggest that the Fed will continue to weigh multiple indicators before making a policy decision.

Recent volatility in rate expectations followed a series of mixed economic releases throughout the spring. While rate cut hopes grew late last year, persistent inflation and stronger-than-expected economic activity had cooled those expectations in recent months. May saw the Treasury market lose 1%, as measured by a Bloomberg index, though it remains up 2.1% year-to-date through early June.

All eyes now turn to the upcoming U.S. government employment report for May, due Friday. Economists expect a payroll gain of 130,000 jobs, down from April’s increase of 177,000, with the unemployment rate forecast to remain at 4.2%. A notable rise in the jobless rate could give the Fed additional justification to pivot toward rate cuts.

Investors will continue to monitor labor market indicators, inflation data, and Fed commentary as they navigate an uncertain path for interest rates heading into the second half of 2025.

Falling Treasury Yields, Inverted Yield Curves, and Market Weakness: Is a Recession Coming?

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The 10-year yield is falling, signaling potential economic concerns.
– Value stocks are holding up, but major indices are down, with only the Dow managing gains.
– The inverted yield curve historically precedes recessions, though recent history has offered mixed signals.
– While small caps have been under pressure, they could present attractive investment opportunities.

As treasury yields decline and the stock market falters, investors are left wondering: Is the U.S. heading into a recession? The market rally that defined much of last year has faded as interest rate cuts have come to a halt, leading to renewed concerns about economic contraction. Historically, the bond market has been a reliable predictor of recessions, and with the longest lasting inverted yield curve ending in late August 2024, suggests that investors should take notice.

The Yield Curve’s Recession Warning

One of the most closely watched economic indicators is the yield curve—the relationship between short-term and long-term interest rates on U.S. government bonds. Typically, longer-term bonds carry higher yields than short-term ones. However, when the yield curve inverts, meaning short-term bonds yield more than long-term ones, it has historically signaled an impending recession.

The record for the longest inverted yield curve was broken in August 2024 with 793 days. The previous record stood at 624 days set in 1979. This is significant because, throughout history, an inverted yield curve has been a highly accurate predictor of recessions. In nearly every case, when the yield curve inverts, a recession follows within 12-18 months. The exception was four years ago when the yield curve inverted three times, yet no recession materialized. The key question now is whether this time will follow historical norms or diverge as it did in the recent past.

Stock Market Implications

The stock market is showing signs of strain. While value stocks are holding up relatively well, major indices have struggled. The S&P 500 and Nasdaq have been in the red, with only the Dow managing to stay in positive territory. This weakness across equities suggests investors are reassessing risk and economic growth prospects.

A falling 10-year yield often signals that investors are seeking safety in government bonds, rather than taking on risk in equities. This shift in sentiment could reflect a broader concern about future economic growth and corporate earnings.

Why Small Caps Could Be a Smart Play

Small-cap stocks, often seen as more economically sensitive, have been particularly vulnerable in the current environment. Unlike large-cap stocks, which can better weather economic downturns due to stronger balance sheets and diversified revenue streams, small-cap companies tend to struggle when borrowing costs are high and consumer demand weakens. However, this very weakness can present opportunity.

Historically, small-cap stocks have tended to perform well coming out of economic slowdowns or recessions. When the Federal Reserve eventually pivots toward cutting interest rates again, small caps could benefit significantly from lower borrowing costs and increased economic activity. Additionally, small-cap stocks tend to be more attractively valued in uncertain times, making them a potential area of opportunity for investors willing to take a longer-term perspective.

Consumer Debt and Economic Strain

Another factor adding to recession fears is the state of U.S. consumer debt. Credit card balances have reached record highs, and with interest rates at their highest levels in decades, the burden on consumers is intensifying. High consumer debt combined with rising delinquencies could lead to reduced consumer spending, which is a major driver of the U.S. economy.

Are We Headed for a Recession?

While no indicator can predict the future with absolute certainty, the current economic signals are concerning. The longest inverted yield curve in the rearview mirror, declining treasury yields, stock market weakness, and record-high consumer debt all point to potential economic troubles ahead. If history is any guide, the U.S. could be facing a slowdown or even a recession in the coming months. However, for investors, this may also present opportunities—particularly in areas like small-cap stocks, which historically rebound strongly as economic conditions improve.

Investors should remain cautious but also look for potential value plays in the small-cap space, as these stocks may offer upside once the market begins to stabilize. As always, diversification and a long-term approach remain key to navigating uncertain times.