U.S. Treasury yields mostly declined as weaker-than-expected employment data from ADP and business activity in the service sector from ISM exacerbated fears of a recession.
The yield on 5-year Treasury bonds fell by 2.1 basis points, reaching 3.323%, while the yield on 30-year bonds was 3.228% (+0.4 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 3.8 basis points to 3.725%, while the yield on 10-year bonds fell to 3.281% (-0.6 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 44 basis points. Experts note that the yield on 2-year Treasury bonds has fallen below the Fed funds rate, which historically signals that the Central Bank is nearing the end of its rate hike cycle.
Fresh signs of a slowdown in the US economy have reinforced expectations that the Fed may suspend the tightening of monetary policy rates due to the deterioration of economic prospects. According to the CME FedWatch Tool, markets see a 56.2% chance that the Fed will keep rates unchanged at its next meeting in early May, up from 52.9% a week earlier. The probability of a 0.25% rate hike is estimated at 43.8% (a week ago the probability of such an event was 47.1%).
Today, investors will focus on data on the number of initial applications for unemployment benefits. Economists had expected that last week the initial jobless claims amounted to 200 thousand compared to 198 thousand a week earlier.
The key event of this week will be the nonfarm payrolls report for March, which will be released tomorrow and will help clarify the Fed's further actions. In recent months, hiring has remained surprisingly steady: 311,000 new jobs were added in February, continuing an 11-month period of stronger-than-expected nonfarm payrolls growth. The March employment report comes out too early to reflect the recent stress in the banking system. However, job growth already looked set to slow this spring after unusually warm weather in January and February and, more generally, as the effects of policy tightening continue to weigh on the economy. It is expected that job growth slowed sharply in March (to 240 thousand from 311 thousand in February). In general, the still tense state of the labor market is likely to be reflected in the dynamics of average hourly wages - experts expect an increase of 0.3% compared to +0.2% in February.