Stock Market Calms Following Growth Scare, Leading to Higher Treasury Yields

Early Wednesday saw a rise in U.S. bond yields, marking a shift from the economic growth concerns that had led to significant stock market risk-aversion and a rush into haven sovereign debt earlier in the week.

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Current Yield Changes

• 2-year Treasury Yield: Increased by 3.9 basis points to 4.026%.
• 10-year Treasury Yield: Rose by 3.2 basis points to 3.929%.
• 30-year Treasury Yield: Added 3.1 basis points to 4.213%.

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Market Dynamics

The benchmark 10-year Treasury yields had previously dropped to a multi-month low of around 3.67% on Monday. This decline was driven by fears about the U.S. economy's health, following weaker-than-expected jobs data and a significant sell-off in global stock markets, prompting investors to seek the safety of government bonds.

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However, these concerns have diminished in recent sessions. Positive U.S. service sector data released later on Monday exceeded expectations, leading to a rally in stock markets. As a result, by early Wednesday, the 10-year yield had climbed back above 3.9%.

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Jim Reid, a strategist at Deutsche Bank, noted, “The relatively orderly improvement in equity markets saw fixed income retreat…as markets inevitably dialed back on Fed cut expectations.”

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Investors are now pricing in a 63.5% probability that the Federal Reserve will cut interest rates by at least 50 basis points from the current range of 5.25% to 5.50% at its next meeting on September 18th. This is a slight decrease from the 68% probability noted the previous day, according to the CME FedWatch tool.

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• Treasury Auction: The Treasury is set to release the results of its $42 billion auction of 10-year notes at 1:00 p.m. Eastern Time.
• Consumer Credit Data: Data for June will be released at 3:00 p.m. Eastern Time.

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The rise in U.S. bond yields reflects a waning of earlier economic growth fears. The initial flight to safety that saw a rush into sovereign debt, driven by weak jobs data and a global stock market sell-off, has reversed as positive service sector data and recovering stock markets have reassured investors. This has led to a recalibration of expectations regarding Federal Reserve rate cuts. Investors now await the results of the upcoming Treasury auction and the release of consumer credit data for further market cues.

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