Short-dated U.S. Treasury yields fell on Wednesday, with two-year yields hitting their lowest since December 2017 in the wake of a report that showed private domestic jobs growth decelerated in May to its weakest in over nine years.
The weak ADP National Employment Report which showed companies hired only 27,000 workers last month, together with hints of possible rate cuts from Federal Reserve officials, spurred an early wave of buying of U.S. government debt.
“That was such a big miss,” Karl Haeling, head of capital markets sales at Landesbank Baden-Wurttemberg in New York, said of the May ADP figure. “If the labor market crashes out, the Fed loses the one thing it has been hanging its hat on.”
Much of the yield curve steepened to levels not seen in seven months, reversing its recent flattening due to concerns about a dramatic economic slowdown stemming from trade disputes between the United States and its trading partners.
Analysts have blamed weakening U.S. data on escalating global trade tensions, which simmered down somewhat after Chuck Grassley, the chairman of the U.S. Senate Finance Committee, said on Wednesday he thinks Mexico and the United States could announce a trade deal on Thursday.
Senior Fed officials have acknowledged that risks from trade, Brexit and other developments could derail the U.S. economic expansion, which this summer could become the longest in history.
Fed Governor Lael Brainard told Yahoo Finance on Wednesday the Fed is prepared to adjust interest rates to sustain economic growth.
In late U.S. trading, yields on two-year Treasury notes , which are sensitive to views on Federal Reserve policy, were 3.20 basis points lower at 1.841 per cent after hitting 1.773 per cent, the lowest since December 2017.
Ten-year Treasury yields were down 0.30 basis points at 2.118 per cent, hovering near their lowest since September 2017.
The spread between two- and 10-year yields grew to near 31 basis points, the widest in seven months.
Global bond yields initially fell on speculation as to whether the Bank of Japan may inject more stimulus, which sent two-year Japanese yields to minus 0.218 per cent, their most negative since April 2017.
Investor demand for Treasuries was curbed by gains on Wall Street, with the S&P 500 index rising 0.6 per cent and a stronger-than-expected report on the U.S. services sector in May from the Institute for Supply Management.
The Fed’s latest Beige Book on regional economic conditions showed companies across the country were anxious about the impact of rising trade tensions.
In the futures market, federal funds contracts implied traders have priced in a 55 per cent chance the Fed would reduce borrowing costs by at least 75 basis points by year-end, up from 51 per cent late Tuesday and 14 per cent a week earlier, CME Group’s FedWatch tool showed.