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Treasury Yields Tumble, Taking 10-Year Notes Below 1.3% as Fed Minutes Loom

Benchmark 10-year note yields slid below 1.3% for the first time since early February and growth concerns slowly trump inflation fears heading into the release of June Fed minutes.

U.S. Treasury bond yields slumped lower Wednesday, pulling benchmark 10-year notes to the lowest since early February, as growth concerns overtake lingering inflation fears heading into the release of Federal Reserve minutes later in the session.

Benchmark 10-year Treasury note yields traded below 1.3% for the first time in five months Wednesday, while the gap between 2-year and 10-year yields, a key market gauge for future GDP growth, narrowed to just 1.084%.

The notes were last seen at 1.330%. 

The moves have extended a rally in Treasury bond prices, which move in reverse of yields, comes amid a paring growth expectations in major economies around the world and the worrying increase in Delta-variant coronavirus infections in Europe and Asia. 

ISM data published Tuesday indicated a notable slowdown in services sector activity -- a key driver of U.S. economic growth -- while the Atlanta Fed's GDPNow forecasting tool is indicating a third quarter advance of around 7.8%, down from 8.6% at the start of the month.

Yesterday's 5% 'top-to-bottom' slide in oil prices, predicated on both the surge in Delta-variant cases in Asia and the chaos linked to the collapse of OPEC discussions on output curbs, also accelerated the Treasury market rally. 

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Inflation concerns, which gripped markets for most of the spring, have faded somewhat, as well, amid a peak in non-oil commodity prices and the slowing impact of fiscal support from the $1.9 trillion American Rescue Act.

All of this puts the release of minutes from the Fed's June rate-setting meeting, which raised the prospect of tapering the pace of the $120 billion the central bank buys from the bond market each month, into stark focus.

Fed Chairman Jerome Powell said on June 16 that the pace of its monthly bond purchases would remain unchanged, and pledged to hold its accommodative policies in place, until the job market has reached full employment and inflation exceeds its target "for some time"

However, the number of Fed governors that expect near-term rate hikes went from four to seven, while 13 seem them for the following year, essentially translating into two 2023 rate hikes based on growth and inflation projections from the 18 FOMC members, otherwise known as the "dot plot".

"Tapering is likely late this year, but that’s a distraction; the real issue is whether rates will have to rise in 2022, earlier than the Fed’s current forecasts," said Ian Shepherdson of Pantheon Macroeconomics. "We think that’s a good bet, and we expect markets increasingly to take the same view."

"The fall, then, will bring a struggle between the Fed leadership and markets which become increasingly skeptical of the dot plot," he added. "Accordingly, we expect 10-year yields to head towards 2% by the year-end, putting pressure on equity valuations even as earnings surge."