2-year Treasury yield ends at almost two-week high despite soft European data

Yields on U.S. government debt finished higher on Monday, reversing earlier declines seen after weak economic data from Europe.

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.906%
rose 4.7 basis points to 4.893% from 4.846% on Friday. Monday’s level is the highest for the 2-year yield since July 11, based on 3 p.m. figures from Dow Jones Market Data. The rate is up for three straight sessions. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.870%
advanced 1.8 basis points to 3.855% from 3.837% as of Friday afternoon. Monday’s level is the highest since July 12.
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.930%
rose 1.1 basis points to 3.917% from 3.906% late Friday. Monday’s level is the highest since a week ago.

What drove markets

Treasury yields began Monday’s New York session by tracking declines on rates for equivalent European paper
TMBMKDE-10Y,
2.426%
after data showed business activity in the eurozone weakened in July at the fastest rate in eight months.

The slowdown suggests recent interest-rate increases by the European Central Bank may be taking their toll.

The European Central Bank will deliver its next monetary policy decision on Thursday, a day after the Federal Reserve is expected to lift rates again as policy makers battle inflation that remains above their 2% target.

Markets are pricing in a 98.9% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25%-5.5% on Wednesday, according to the CME FedWatch Tool. The chances of another 25-basis-point hike by November is seen at 31.2%.

The U.S. central bank is expected to take its fed funds rate target back down to around 5% or lower next year.

In U.S. economic updates released on Monday, the S&P flash U.S. manufacturing PMI rose to a three-month high of 49.0 in July from 46.3 previously, while the services-related reading dropped to a five-month low of 52.4 from 54.4 in June. Any number above 50 signals expansion, while numbers below 50 point to contraction.

What analysts are saying

“The U.S. economy still has a lot of momentum; we pushed back our recession call and now see the Fed on hold for longer, following the 25bp hike we expect this week [on Wednesday] and another in September or November,” said Ben McLannahan, Sue Ho, and Nick Gentle of Barclays.

“We expect the ECB [on Thursday] to hike by 25bp and to guide that it is close to the peak, though not necessarily there yet,” they wrote in a note. “We think the BoJ [Bank of Japan, on Friday] will stand pat, waiting for more evidence of sticky prices before launching revisions to its Yield Curve Control policy in October.”

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