Treasury yields fall as more and more investors rely on Fed rate cuts

Treasury yields hit their lowest level after a duel of moderate readings on the US manufacturing sector sparked concern over the slowdown in the US economy and heightened expectations according to which the Federal Reserve could reduce interest rates later this year.

The yield on 10-year US government bonds fell 5.2 basis points to a new 10-week low of 2.58% before falling back to 2.6%. Investors are increasingly betting that weak economic data would not just guarantee that the Fed would maintain its rates unchanged, but could also encourage it to start cutting spending later this year.

The Fed Funds futures market indicates that investors believe that there is now a 31% chance that the US central bank will lower its interest rates by the end of 2019, the highest level since the market turmoil in December and early January.

Treasury yields began to fall on Friday morning after a gauge of manufacturing activity in New York posted the slowest growth in its history for nearly two years. Bond yields accelerated their decline less than an hour later, while another more widely followed report showed that US industrial output had risen less than expected.

"The weaker than expected data has given the market a bad wind," said Jon Hill, US rate strategist at BMO Capital Markets. "The fact that capacity utilization has declined for three consecutive months and the manufacturing sector continues to decline should certainly be a worrying sign for the market and for investors in general."

Industrial production – an indicator of production in factories, mines and utilities – only increased 0.1% over a month in February. Although this is a rebound from the 0.5% drop recorded in January, it was below the 0.4% expected by the market.

Stressing that equity investors are also delighted to see the Fed resting on its feet, the S & P 500 index rose 0.7% in New York and achieved its best weekly performance since November. Attention is now shifting to the US Central Bank meeting next week and in particular whether policymakers will reduce their economic forecasts.

"There will be so much eyeing next Wednesday," Hill said.

A detailed badysis of the industrial production report did not make much progress as manufacturing output fell for a second straight month in February.

"The manufacturing data in this report tend to be volatile, which may be due to seasonal adjustment, particularly in the automotive sector, or reporting difficulties," said Joshua Shapiro, Chief Economist. American at MFR. "In any case, most of the evidence for the manufacturing sector points to a softening of the situation, with decent domestic demand being thwarted by more modest export growth."

The weak series of economic data that has emerged since the beginning of the year has led economists to reconsider their forecasts for growth in the US economy this year. A "follow-up estimate" from the Atlanta Fed is forecasting growth of 0.4% in the first quarter.

Expectations that a slowdown in growth will prompt the Fed to curb any tightening of rates will also accentuate the decline in the so-called yield curve. The difference between 10 and 30-year Treasury bill yields was 42.41 on Friday, its highest level since November 2017.