U.S. Treasuries flat in muted session; next week’s FOMC rate cut eyed

The U.S. Treasuries traded nearly flat during early muted session on Friday as investors await next week’s FOMC monetary policy decision where the Federal Reserve is widely expected to lower its fed funds rate to 1.50-1.75 percent – its third cut this year.

A 25 basis points rate cut is currently priced in with more than 90 percent probability.

The yield on the benchmark 10-year Treasury yield remained flat at 1.771 percent, the super-long 30-year bond yield hovered around 2.268 percent and the yield on the short-term 2-year too remained stuck range-bound at 1.586 percent by 11:50GMT.

We expect the Federal Reserve will cut rates again by 25bp when it meets next week (announcement Wednesday 19:00 CEST). While economists are evenly divided between those expecting a cut and those expecting the Fed to remain on hold, investors have nearly fully priced in a cut (90% probability, according to Bloomberg), Danske Bank noted.

However, we would have expected the Fed to talk down market expectations more explicitly if it was not easing again. We also believe it makes sense to ease when looking at the data, the bank added.

“On Thursday, U.S durable goods orders were a little weaker than expected, but less so ex-transport. Initial jobless claims were on the mark and the manufacturing PMI was a bit better than expected. The services PMI was on the mark, while new home sales largely held onto last month’s surge, as expected. In Europe, Germany’s manufacturing PMI provided no surprises but services undershot. The euro area PMI failed to lift as anticipated”, ANZ noted.