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July 18, 2019, 3:35 p.m. EDT

Two-year Treasury yield tumbles after Fed’s Williams lays out case for insurance rate cuts

New York Fed President John Williams indicates support for preemptive rate cuts

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By Sunny Oh

Short-term Treasury yields fell sharply on Thursday after a senior Federal Reserve official suggested the U.S. central bank should act early and decisively to signs of economic weakness.

What are Treasurys doing?

The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.70%   was down 1.9 basis points to 2.040%, while the 2-year note rate /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +2.48%  , sensitive to shifting expectations for Fed policy, slipped 5.7 basis points to 1.776%. The 30-year bond /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -0.70%  was flat at 2.568%. Debt prices move in the opposite direction of yields.

The German 10-year government bond yield /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y -1.32%   fell 2 basis points to negative 0.35%.

What’s driving Treasurys?

Expectations for a half percentage point rate-cut received a boost after New York Fed President John Williams said it made sense to ease policy before economic data deteriorated materially. “When you have only so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress,” Williams said.

Traders in the fed funds futures market now see more than a one in two chance of a 50 basis point rate cut by the Federal Reserve at its July 30-31 meeting.

Investors saw fresh signs that U.S. and China had yet to resolve previous stumbling blocks that have stymied past trade negotiations and led to weaker economic data. President Donald Trump complained on Tuesday that China was not delivering on their pledges to buy more U.S. agricultural imports. News reports also say the Trump administration was unsure how to ease restrictions on Huawei Technologies Co without triggering national security issues.

What did market participants’ say?

”In the event of a half-point, the market narrative will vacillate between ‘Powell has no idea what to do’ and ‘the Fed sees something we don’t’. Whether or not the risk to credibility and communicating that greater troubles are ahead is worth the value of a ‘surprise’ in easing financial conditions more dramatically will undoubtedly be part of the Committee’s discussion,” said Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets.

“At the end of the day, barring any pressing deterioration evident in the hard data, it’s a challenge to see the Fed jumping so far in front of an actual slowdown,” wrote Lyngen.

add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
-0.01 -1.70%
Volume: 0.00
Sept. 23, 2020 5:02a
add Add to watchlist BX:TMUBMUSD02Y
BX : Tullett Prebon
+0.0033 +2.48%
Volume: 0.00
Sept. 23, 2020 5:00a
add Add to watchlist BX:TMUBMUSD30Y
BX : Tullett Prebon
-0.01 -0.70%
Volume: 0.00
Sept. 23, 2020 5:03a
add Add to watchlist BX:TMBMKDE-10Y
BX : Tullett Prebon
-0.0066 -1.32%
Volume: 0.00
Sept. 23, 2020 11:03a

Sunny Oh is a MarketWatch fixed-income reporter based in New York.

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