Treasury yields end above one-year lows as traders ramp up 'soft landing' bets

By Joseph Adinolfi

Yields on short- and long-dated Treasurys drifted higher on Monday as traders bet that the Federal Reserve would deliver the "soft landing" that investors have been hoping for.

What's happening

The yield on the 2-year Treasury note BX:TMUBMUSD02Y gained less than 1 basis point, to 3.576%, as of 3 p.m. Eastern time, according to Dow Jones Market Data. The yield on the 10-year Treasury note BX:TMUBMUSD10Y gained 1.3 basis points, to 3.740%. The yield on the 30-year Treasury bond BX:TMUBMUSD30Y increased by 1.3 basis points, to 4.083%.Yields were up four of the past five trading days, after setting fresh one-year lows on Sept. 16, according to Dow Jones Market Data.

What drives markets

The difference between short-dated and long-dated Treasury yields widened by about 16 basis points on Monday. The gap has increased since last week when the Fed cut the target for its policy rate by 50 basis points, a larger move than many on Wall Street had expected.

Since then, long-dated yields have risen more quickly than short-dated yields as a popular recession trade slammed into reverse. Bond yields move inversely to bond prices, rising as prices fall.

Many now see a soft landing - a scenario where the Fed lowers interest rates quickly enough to avert a recession - as increasingly likely, according to commentary from Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, that was shared with MarketWatch early Monday.

See: Bond market gets a Fed wake-up call after pricing in a recession

Some said this signaled a vote of confidence in Fed Chair Jerome Powell, who said during last week's press conference that the jumbo cut wasn't an indication of economic weakness. Instead, the Fed's decision to opt for the bigger move was a sign of its commitment to avoiding a more pronounced downturn in the labor market, Powell said.

Although the Fed's latest batch of official forecasts hinted at only two more 25-basis-point cuts later this year, traders have recently dialed up bets that at least one of the Fed's remaining policy meetings this year will yield another 50-basis-point cut.

Expectations for a soft landing and more jumbo cuts ahead helped push the yield curve further into positive territory on Monday, bond-market experts said.

Analysts from FHN Financial pointed out on Monday that the yield curve hasn't been this steep since June 2022.

For more than two years, short-term yields had been higher than long-term yields. But that ended earlier this month as the Fed's first interest-rate cut of the cycle drew nearer.

As of early Monday, long-dated yields remained at their highest levels in two weeks as investors digested the latest round of comments from senior Fed officials.

"There's an anticipation we're going to get more of them, which is why you're seeing the curve steepen out at the short end," said Larry Milstein, managing director of government and agency trading at R.W. Pressprich & Co., during an interview with MarketWatch.

Monday's session was relatively quiet, with Japanese investors out because of a holiday, while traders in the U.S. were digesting the latest reading on manufacturing and services-sector activity in the U.S. Both gauges showed services activity expanded while manufacturing activity continued to struggle.

Last this week, investors will receive the latest reading on second-quarter GDP growth, as well as a reading on how the Fed's preferred inflation gauge, the PCE price index, developed in August.

The market will also need to digest the latest flurry of fresh supply this week. The Treasury is due to auction $69 billion in 2-year notes on Tuesday, followed by $70 billion in 5-year and $4 billion in 7-year paper on Wednesday and Thursday.

-Joseph Adinolfi

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09-23-24 1612ET

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