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U.S. consumer confidence falls in September
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U.S. Richmond Fed index shows contraction in business activity
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China unveils stimulus measures, impact limited
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U.S. rate futures price in 62% chance of big rate cut in November
(Rewrites paragraph 1, adds new comment, bullets, graphic, U.S. two-year note auction, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 24 (Reuters) - U.S. Treasury yields slipped in choppy trading on Tuesday as weak confidence numbers and a lower-than-expected business conditions index nudged up the possibility that the Federal Reserve could do another outsized rate cut at the November policy meeting.
A decent auction of U.S. two-year notes added to the bid on Treasuries, pushing their yields lower, as demand for front-end notes increased with the Fed launching its easing cycle last week.
Angelo Manolatos, macro strategist, at Wells Fargo said shorter-dated debt is in great demand overall as investors are more "confident that inflation is much calmer" and growth including labor market indicators look to be slowing down as well.
"The Fed cut 50 basis points last week and it could continue to ease at that very large increment...So from an investor standpoint, the risk of higher rates is diminishing and with that, it looks a lot better to be long Treasuries."
U.S. rate futures have priced in a 62% chance of another super-sized rate cut of 50 bps at the November meeting, up from 54% on Monday, LSEG calculations showed. The more standard 25-bp easing showed a 38% probability on Tuesday. For the next two Fed meetings, rate futures are implying more than 80 bps in cuts.
Earlier in the session, Treasury yields were higher across the board, supported by elevated risk appetite after China introduced broad stimulus measures to support its faltering economy and solid U.S. housing data.
U.S. yields on seven-year notes to 30-year bonds hit fresh three-week highs, while the yield curve again hit its steepest level since June 2022, touching that milestone for a fifth consecutive session.
But that all changed with the release of the soft Conference Board consumer sentiment survey. U.S. consumer confidence unexpectedly fell in September. The Conference Board's consumer confidence index dropped to 98.7 this month from an upwardly revised 105.6 in August. The decline was the largest since August 2021. Economists polled by Reuters had forecast the index rising to 104.0.
The Richmond Fed index fell to a 52-month low of -21 from a prior low of -19 in August and a low before that of -17 in July. The index covers activity in the fifth Fed District, which includes the District of Columbia, Maryland, Virginia, North Carolina, South Carolina and most of West Virginia, and produces approximately 9% of the country's gross domestic product.
Treasury yields earlier held their gains after data showing house prices rose 0.1% on a month-on-month basis after being unchanged in June. They increased 4.5% in the 12 months through July, though that's the smallest rise since June 2023.
In afternoon trading, the benchmark 10-year yield was slightly down at 3.733% after earlier hitting a three-week high of 3.81% following the housing data.
U.S. 30-year yields were flat at 4.09%, also hitting a three-week peak of 4.154% earlier in the session.
On the short end of the curve, U.S. two-year yields post-auction slid 3.6 bps to 3.54%. Those on the five-year fell 2.3 bps to 3.473%.
The two-year note sale picked up a
high yield of 3.520%
, in line with market forecasts at the bid deadline. The bid-to-cover ratio, a gauge of demand, was 2.59 lower than last month's 2.68 and the 2.63 average.
Indirect bidders, which include foreign central banks, took 67.6% of the notes, compared with an average of 66.8%, BMO analysts said.
In other parts of the bond market, the U.S. two-year/10-year yield curve, a gauge of investors' economic outlook saw its spread widen to as much as 20.2 bps , the steepest since June 2022. The curve was last at positive 19.4 bps.
Late on Tuesday, the curve saw a bull steepener, a scenario in which short-term rates are falling faster than their longer-dated counterparts, which for the most part suggested that more rate cuts are underway.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Marguerita Choy)
