U.S. bond yields were mostly a touch lower on Wednesday as traders shrugged off a downgrade to the U.S. government’s credit rating by rating agency Fitch.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
slipped by 4.6 basis points to 4.871%. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated 1 basis point to 4.022%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
rose 1.6 basis points to 4.111%.
What’s driving markets
While equities and currencies show signs of stress after Fitch downgraded the U.S. government’s credit rating, the Treasury market is taking the news in its stride, with yields little changed.
Indeed, analysts noted that at previous times of such stress, the U.S. government bond market has rallied as investors remained attracted by its perceived haven status.
“While S&P’s August 2011 downgrade resulted in a sharp rally in Treasuries as investors counterintuitively flocked to U.S. debt as a safe haven asset amid a broader risk-off move, we generally expect the market’s reaction to Fitch’s downgrade to be more muted. Note that we do not expect any other significant action on the U.S. credit rating in the near-term,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
“Treasury investors remain much more focused on growth, inflation, and other top-tier data dynamics for direction. While any market price action on the downgrade should be short-lived, GSE [government sponsored enterprise] spreads could face some increased volatility as GSE ratings are likely also be lowered in tandem with the U.S. ratings cut,” he added.
The main U.S. economic data point published on Wednesday is the ADP employment report for July, due at 8:15 a,m. Eastern. This and Friday’s nonfarm payrolls report will feed into the Federal Reserve’s calculations on whether to continue tightening monetary policy.
Markets are pricing in an 85% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on September 20, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 29%.
The central bank is not expected to take its Fed funds rate target back down to around 5% until May 2024, according to 30-day Fed Funds futures.
The U.S. Treasury will publish its refunding program at 8:30 a.m. Eastern. Thomas Simons at Jefferies thinks it will announce a $99 billion package of $41 billion 3-year notes, $36 billion 10-year notes, and $22 billion 30-year bonds.
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