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Bond Yields Fall as European Data Disappoints and Central Bank Decisions Awaited


What’s Happening

  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.841% slipped by 2.1 basis points to 4.837%. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.822% retreated 2.3 basis points to 3.818%.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.889% fell 1.7 basis points to 3.888%.

What’s Driving Markets

Treasury yields are following the downward trend of European bond yields TMBMKDE-10Y, 2.413% after new data revealed a slowdown in economic activity in the eurozone during July, reaching an eight-month low.

This decline in economic performance could be a result of recent interest rate hikes implemented by the European Central Bank (ECB) as well as a decrease in demand from China.

On Thursday, the ECB is expected to make its monetary policy decision, which follows a day after the Federal Reserve’s anticipated move to further tighten its policy in order to combat inflation that currently exceeds its target of 2% by 1 percentage point.

Based on the CME FedWatch tool, markets have virtually priced in a 99.8% probability of a 25 basis point interest rate increase by the Fed, pushing the range to 5.25% to 5.50%, following its meeting on Wednesday.

Additionally, there is a 16% chance of another 25 basis point rate increase after the September meeting, and a 28% chance after the November meeting.

It is not anticipated that the central bank will lower its Fed funds rate target to around 5% until May 2024, as indicated by 30-day Fed Funds futures.

U.S. Economic Updates: Expectations for Central Banks


On Monday, there will be key U.S. economic updates, including the S&P “flash” U.S. manufacturing and services PMIs for July. These updates are scheduled to be released at 9:45 a.m. Eastern time.

Analyst Insights

Here’s what analysts from Deutsche Bank have to say about the upcoming central bank activities:

Federal Reserve (Fed)

The analysts highlight that the focus of this meeting is on any potential changes in the Fed’s messaging, especially considering the recent soft inflation data. While they acknowledge the progress made, the economists believe there is currently little downside for the Fed to deviate from its hawkish bias, even if it acknowledges the need for some adjustments.

European Central Bank (ECB)

According to European economists, a hike of +25bps is anticipated from the ECB, which would bring the deposit rate to what they consider a terminal level of 3.75%. Although they view a September hike as a genuine possibility, it is important to pay attention to the Eurozone bank lending survey to assess any changes in lending standards, given the currently tight and restrictive levels.

Bank of Japan (BoJ)

The Bank of Japan will conclude the busy week for central banks with its decision on Friday, along with the release of their quarterly Outlook Report. The Chief Japan economist suggests that there is approximately a 40% probability of a policy revision; however, their baseline expectation remains no change in the monetary stance.

It will be interesting to see how these central bank decisions and reports shape the economic landscape in the coming days.

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