Expectations of interest rate cuts and trade tensions resonate, with the two-year U.S. Treasury yield approaching its lowest level since 2022
Due to market expectations that U.S. interest rates will continue to decline, coupled with the renewed escalation of U.S.-China trade tensions, demand for safer assets has increased, leading to a slight rise in U.S. Treasury prices. The yield on the 10-year Treasury fell to 4.01%, while the 2-year yield dropped to 3.47%. Federal Reserve Chairman Jerome Powell hinted at the possibility of another rate cut, resulting in a general strengthening of the global bond market. Investors are focused on the upcoming manufacturing data and speeches from Federal Reserve officials
According to Zhitong Finance APP, due to market expectations that U.S. interest rates will continue to decline and the renewed escalation of U.S.-China trade tensions stimulating demand for safer assets, U.S. Treasury prices rose slightly. On Wednesday, the yield on the 10-year U.S. Treasury bond fell by 2 basis points to 4.01%. If it indeed falls below 4%, this rate will reach its lowest level since early April; the yield on the 2-year U.S. Treasury bond fell by 1 basis point to 3.47%, close to levels seen three years ago.
Since the escalation of trade negotiation frictions last week, which triggered renewed demand for U.S. Treasuries as a safe-haven tool, U.S. Treasury prices have risen, with yields cumulatively falling by more than 10 basis points.
Federal Reserve Chairman Jerome Powell hinted in a public speech on Tuesday that due to signs of economic weakness, the Fed may cut rates again later this month. Powell also mentioned that the central bank may soon stop reducing its balance sheet, a statement that further supported U.S. Treasury prices.
Meanwhile, the global bond market also generally strengthened. Strong demand for Japan's 20-year government bond auction pushed long-term bond prices higher; French bonds also strengthened due to market optimism that the government would weather the latest round of political turmoil.
Michael Brown, senior research strategist at Pepperstone, stated that the current level of U.S. Treasury yields indicates that investors expect the federal funds rate to drop from the current level of about 4.25% to 3% by mid-next year.
Therefore, Brown believes that unless shocks from Trump reignite safe-haven demand, yields are unlikely to fall significantly further.
"If the 100% tariff threat proposed by Trump starts to look more realistically possible, then the most likely factor to trigger further increases in U.S. Treasury prices (i.e., further declines in yields) would be a resurgence of market panic over economic growth," he said.
Investors will focus on manufacturing data to be released later on Wednesday, as well as speeches from Federal Reserve policymakers including Stephen Milan, Christopher Waller, and Jeffrey Schmidt.
Due to the ongoing government shutdown causing data delays, the key inflation data originally scheduled for release on Wednesday has been rescheduled for October 24
