NEW YORK- Treasury yields slid on Wednesday after weak US and European business activity signaled global disinflation as markets await possible indications of where the Federal Reserve sees interest rates ahead of its annual summit at Jackson Hole, Wyoming.
US business activity approached the stagnation point in August, with growth at its weakest since February, as demand for new business in the vast service sector contracted, while the downturn in euro zone activity was far deeper than expected.
The declines in the purchasing managers’ indices added to a shift this week in which the market sees growth and inflation after Treasury yields surged this month to decade highs following a recent burst of robust US economic data.
“What the market is starting to confront in the last few days is maybe we got it all wrong,” Thierry Wizman, global FX and interest rates strategist at Macquarie in New York said of a narrative painting an exceptionally strong US economy.
“Maybe what’s happening here is that we’re going to get lower inflation, but we’re going to get it in the context of a soft economy in Europe, in China especially, and potentially also in the US by extension.”
The yield on 10-year Treasuries fell 13.6 basis points to 4.192 percent , after earlier this week touching 4.366 percent , a high for the US benchmark last seen in November 2007.
The two-year’s yield, which reflects interest rate expectations, slid 7.2 basis points to 4.965 percent as it fell below the key 5 percent threshold.
Before the PMI data, yields on the 10-year note had climbed almost 40 basis points this month as markets more openly accepted the Fed’s mantra that rates would be higher for longer.
The 10-year inflation-protected note fell to 1.854 percent after rising above 2 percent the past two days for the first time in 14 years.
“We’re in a pause until rates decide whether or not the Fed is going to be consistent in getting to its 2 percent (inflation) target or whether they’re going to back away from its 2 percent target and accept something higher,” said Steven Ricchiuto, US chief economist at Mizuho Securities USA LLC in New York.
“You got this confluence of factors, saying ‘OK, maybe we need to be higher with rates, but how much higher do we need to get?’” he said. “The answer is you’re going to settle someplace around 4.5 percent .”
