Bond Yields Fall on Weak China Growth Data

by Warren Seah

Bond yields experienced a decline on Monday following the release of disappointing China growth data, raising concerns about the global economy’s slowdown.

Market Movements

  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.721% slipped by 2.5 basis points to 4.721%. (Yields move in the opposite direction to prices)
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.779% retreated by 4.5 basis points to 3.787%.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.890% fell by 3.4 basis points to 3.895%.

Factors Driving the Markets

Government bond yields dropped following the release of weaker-than-expected China growth data. This development has raised concerns about the overall state of the global economy.

Given the fact that China’s factory-gate prices are already in deflationary territory, the potential decrease in demand from the world’s second largest economy could help manage goods inflation in developed nations. This scenario may assist central banks in their efforts to combat consumer price pressures.

The market is currently pricing in a 96% probability of a 25 basis points interest rate increase by the Federal Reserve. This would bring the interest rate range to 5.25% to 5.50%, following the central bank’s meeting on July 26, as indicated by the CME FedWatch tool.

The likelihood of rates staying at this level after subsequent meetings in September and November stands at 83% and 71% respectively.

The Future of the Fed Funds Rate

According to 30-day Fed Funds futures, the central bank is not expected to lower its Fed funds rate back down to around 5% until April 2024.

Upcoming U.S. Economic Updates

U.S. economic updates set for release include the Empire State manufacturing survey for July, scheduled for 8:30 a.m. Eastern.

Analysts’ Perspectives

Soft-Landing ETF and Early Signs of Recession

“It’s fair to say that if there was a soft-landing ETF it would have soared last week after soft Manheim auto prices, soft US CPI and PPI, and weekly jobless claims that are edging back down after a recent move higher. It would be crazy to deny the good news, however it’s worth highlighting that it’s still very early in the Fed hiking cycle for a recession to occur and quite early in the yield curve window,” said Jim Reid, strategist at Deutsche Bank.

Key Data Highlights in the Week Ahead

“In a week ahead where the Fed are on their pre-FOMC blackout period, U.S. retail sales (tomorrow), U.S. housing starts (Wednesday) and U.S. existing home sales (Thursday) are the main data highlights stateside. Housing starts unexpectedly spiked last month so there will be a lot of attention on this. Soft-landing proponents will suggest that it’s hard for there to be a hard landing if housing is recovering.” Reid added.

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