U.S. Treasury Yields Decline as Investors Focus on Future Policy Path
On Monday (July 21), U.S. Treasury yields broadly fell as investors awaited an important speech by Federal Reserve Chairman Jerome Powell, while reassessing the outlook for the U.S. economy and changes in global trade dynamics.
Data showed that the 2-year U.S. Treasury yield fell by 3 basis points to 3.85%, the 10-year yield declined by 6 basis points to 4.38%, and the 30-year yield dropped by over 6 basis points to 4.94%. The spread between short-term and long-term rates narrowed to 53 basis points, reflecting heightened expectations of an economic slowdown over the medium to long term.
Weak Economic Indicators Boost Rate Cut Expectations
The Conference Board reported that its Leading Economic Index for June dropped by 0.3% to 98.8, exceeding the expected decline of 0.2%. The agency stated that while there are currently no signs of an economic recession, the growth outlook for 2025 is bleak, with inflationary pressures and tariff costs likely to surface in the second half of the year, further suppressing consumer spending.
This report reinforced market expectations of slower economic growth ahead and indirectly supported the trend of rising bond prices and falling yields.
Federal Reserve Moves in Focus as Powell Breaks Silence
With the Federal Open Market Committee (FOMC) meeting scheduled for next week, the Federal Reserve is currently in a "silent period," making Powell one of the few officials speaking out. In his Tuesday speech, he is expected to convey significant policy signals, potentially addressing the interest rate path, inflation trends, and attitudes toward U.S. fiscal policy and global trade shifts.
The market widely anticipates that the Federal Reserve is likely to keep interest rates unchanged but will continue to monitor consumption and employment data to assess whether there is room for a rate cut later in the year.
Bessent's Remarks on "Examining the Fed" Draw Attention
On Monday evening, U.S. Treasury Secretary Bessent stated in a media interview that a "systematic review" of whether the Federal Reserve is functioning as a complete institution is needed. He declined to comment on whether he advised President Trump not to dismiss Powell or address warnings about potential market turmoil if Powell were to leave.
These statements were seen by the market as a subtle hint at the Federal Reserve's independence, adding to policy uncertainty.
International Markets in Sync; Bond Market Risk Aversion Increases
Besides U.S. Treasuries, European bond markets generally declined on Monday, with the 10-year German bond yield slightly falling to 2.615% by the close. French and Italian bonds also saw varying degrees of decline. UK bond yields initially fell sharply but slightly rebounded, with the 10-year UK bond closing at 4.603%, slightly below the previous trading day.
Eurozone bond markets attracted significant foreign investment. According to European Central Bank data, net inflows in May approached 100 billion euros, highlighting a shift of funds away from U.S. Treasuries.
U.S. Treasury Accelerates Primary Market Issuance
In the primary market, the U.S. Treasury issued a total of $155 billion in short-term Treasury bills on the day, consisting of $82 billion in 13-week bills and $73 billion in 26-week bills. On Tuesday, it is scheduled to issue an additional $80 billion in 6-week bills, indicating rising short-term financing needs.
