Short-dated U.S. Treasury debt prices gained Tuesday on firming expectations for Federal Reserve interest rate cuts in the face of a sagging economy.
Concerns about the financial sector weighed on stocks as disappointing corporate news at the start of the earnings season sparked safe haven buying of two-year notes.
That pushed their yields well below the 2 percent mark, which they had nearly hurdled the previous session.
Minutes from the Fed's March 18 policy meeting added to the gathering impression of economic gloom.
These showed the central bank's staff projected U.S.
real gross domestic product would contract in the first half and warned that an economic downturn could be severe and prolonged.
"What grabbed some traders' attention was the item about the risk of a prolonged and more severe downturn.
Bonds like that," said Cary Leahey, economist and managing director with Decision Economics in New York.
U.S. short term interest rate futures showed the implied chance of a 50 basis points Fed rate cut at the end of this month had risen to about 44 percent after the FOMC (Federal Open Market Committee) minutes were released, up from about 32 percent on Monday.
A shallower 25 basis points cut remains fully priced in.
Short maturities respond closely to expectations for official U.S. central bank rate moves.
The two-year Treasury note's price, which moves inversely to its yield, rose 3/32 for a yield of 1.88 percent "We expect at least 50 basis points more of easing by mid-year by the Fed and the 2-year yield will also remain capped by ongoing financial turmoil," said T.J.
Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York.
The two-year yield's upper ceiling through mid-year could remain about 2 percent as U.S.
economic data worsens, he expects.
Yet the minutes' acknowledgement of persistent inflation pressures weighed on longer maturity bond prices, pushing their yields higher.
Long-dated bonds are particularly susceptible to inflation, which erodes fixed-income securities' values.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, fell 4/32 for a yield of 3.56 percent, versus 3.55 percent late Monday.
"In the short term, 3.60 percent has been tough resistance for the 10-year yield, but as the FOMC minutes noted, inflation pressures are going to remain elevated, and there is the potential that expectations are going to come unmoored," said Marta.
That scenario would likely push its yield higher.