Treasury yields pull back after U.K. abandons tax cuts, U.S. data weakens Bond Report

By Vivien Lou Chen and William Watts

Treasury yields pulled back sharply on Monday after the U.K. government withdrew planned tax cuts, bolstering British bonds, and data showed a slowdown in U.S. manufacturing activity.

Nervous investors were also keeping an eye on the financial health of a large European bank amid fears aggressive tightening by global central banks is beginning to cause collateral damage.

What yields are doing

The yield on the 2-year Treasury note /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +0.97% fell to 4.103%, down from 4.206% at 3 p.m. Eastern time on Friday. As of Friday, the 2-year yield had jumped 1.309 percentage points over the last two months, its largest two-month gain since May 1984, according to Dow Jones Market Data. Yields and debt prices move opposite each other.
The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.59% fell to 3.65% versus 3.802% Friday afternoon. The yield had risen 82.9 basis points, or 0.829 percentage point, in the third quarter, its largest quarterly rise since the first quarter of 2021. Its 67.1-basis-points monthly rise in September was the largest since July 2003.
The 30-year Treasury bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.49% was at 3.705%, down from 3.762% late Friday. The yield on the long bond had gained 50.8 basis points last month, its largest rise since January 2009.

Market drivers

Yields on U.K. government bonds, or gilts, /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y +1.27% fell back and the British pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.1588% rose after the U.K. government scrapped plans to cut taxes for the wealthiest earners, canceling one of the main components of a debt-funded budget that had roiled financial markets. The Bank of England was forced to step in last week to buy gilts and arrest a surge in yields that had threatened to tank pension funds .

The volatility surrounding the U.K.’s fiscal woes also underlined concerns about liquidity in the Treasury market, analysts said.

Read: Will something break? What’s next for global financial markets after U.K. meltdown.

Meanwhile, concerns over financial stability reverberated as a new week, trading month and quarter got under way on Monday. Shares of Credit Suisse fell sharply in European trade, while the cost of insuring against a default by the Swiss banking giant remained elevated.

See: Credit Suisse: What’s going on, and why its stock is falling

Key Words: ‘I do not think this is a Lehman moment’, Mohamed El-Erian says of Credit Suisse

The Institute for Supply Management said its closely watched U.S. manufacturing index fell to a 28-month low of 50.9% in September, or the lowest level in more than two years, as high inflation and rapidly rising U.S. interest rates began to rattle the economy. Economists polled by The Wall Street Journal had forecast the index to drop to 52% from 52.8% in August.

Jobs data will be in focus for the U.S. later this week, culminating with the release of the September jobs report on Friday.

What strategists say

“It’s notable that the price action led to a steeper curve with the front end of the market leading the rally, and, while we’re sympathetic to concerns that the [recent] weakness in risk assets will eventually curtail global monetary policy makers’ hiking ambitions, it’s far too soon to anticipate a pivot from the FOMC,” said Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital, in a note, referring to the Fed’s policy-setting Federal Open Market Committee.

“In fact, as inflation continues to broaden in terms of categories impacted, the case for another 75 [basis points] hike in November remains strong — and is our baseline assumption at this stage,” they wrote.

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