Treasury Yields Rebound From Generational Lows

Wall Street is growing more convinced that the Federal Reserve will cut short-term interest rates again. But that sentiment didn’t help the bond market on Tuesday.

Treasury yields rebounded after diving on Monday, when rates on some government securities fell to generational lows.

Bond traders said the market was under pressure as the government sold $22 billion in five-year T-notes to fund the growing federal deficit, and as the stock market revived, causing some bond owners to sell and shift capital to stocks.

The stock market’s rally was attributed in part to a report from brokerage Lehman Bros. saying the Fed is likely to cut its key short-term rate, now 1.75%, to 1% by year’s end to help the economy.

Central bank policymakers will meet on Tuesday, though most analysts don’t expect a cut so soon. Instead, many experts believe the Fed will signal at the meeting that it is prepared to cut rates further, and will do so later this year.

In the Treasury market, yields have tumbled over the last three weeks, driven lower by a demand for “safe haven” securities as stocks have dropped, and reflecting rising belief that the Fed will ease credit, analysts say.

The yield on five-year T-notes plunged from 3.8% on July 15 to a generational low of 3.11% on Monday. On Tuesday the yield on newly auctioned five-year notes was 3.35%.

The yield on 10-year T-notes jumped to 4.33% Tuesday from 4.21% Monday, and the two-year note yield rose to 2.04% from 1.89% Monday.

Treasury yields may fall again in the next few days if economic reports are weak, putting more pressure on the Fed to cut rates, analysts said.

Interest-rate futures contracts show traders see about a 2-in-3 chance the Fed will cut its key rate to 1.5% when it meets Sept. 24.