Yields mixed amid shutdown data fog, post-Fed rate cut doubts

By Davide Barbuscia

U.S. Treasury yields were mixed in early trade on Monday, with the market keeping the bearish tone of last week, when Fed boss Jerome Powell threw cold water on the possibility of additional monetary easing this year, while investors scrambled for clues on the U.S. economy amid lagging data due to the government shutdown.

The Federal Reserve cut interest rates by 25 basis points last week but Powell said there was no certainty there would be additional easing at the Fed's next rate-setting meeting in December, contrary to market expectations, as inflation remains above the central bank's target and the economy, while slowing, continues to hum along.

Meanwhile, the government shutdown that started on October 1 could become the longest ever this week, interrupting the flow of key economic data at a moment of uncertainty among policymakers and investors as they try to assess the direction of inflation and a weakening in the jobs market.

"I think we got too far too fast in terms of yields going lower," said Kelly Kowalski, head of investment strategy at MassMutual.

"The market came to price in a lot of Fed cuts and Chair Powell tempered those last week ... even more important than December, this called into question a lot of the cuts that were priced in next year and how the Fed is thinking about those," she said. "A lot of it has to do with the data blackout," she added.

Economic data on Monday showed U.S. manufacturing contracted for an eighth straight month in October as new orders remained subdued. The Institute for Supply Management said on Monday its manufacturing PMI fell to 48.7 last month from 49.1 in September.

Treasury yields, which move inversely to prices, inched lower after the data.

Benchmark 10-year yields US10Y were last at 4.107%, slightly higher than late last week. Two-year yields (US2YT=RR) were last at 3.596%, about one basis point lower than on Friday. Further out in the curve, 30-year yields (US30YT=RR) rose instead and were last at 4.693%, nearly three basis points higher.

Later on Monday the Treasury Department will release its quarterly borrowing estimates, followed by the quarterly refunding on Wednesday, which bond investors will keep a close eye on to assess how the government plans to finance its deficits.

Meanwhile, supply considerations may extend beyond government issuance as tech companies issue mammoth bonds in the corporate debt market that could compete with the government for borrowed funds.

Meta META was in the market for a $30 billion bond last week, its biggest bond offering ever, and Google owner Alphabet GOOG is tapping the U.S. dollar and euro debt markets in a multi-tranche senior unsecured notes offering.