U.S. Treasuries up three trading days… Bets on a December rate cut expand [Fed Watch]

Korea Economic Daily

Summary

Reported that U.S. Treasuries were strong for three consecutive trading days and the 10-year yield fell to this month's low of 4.03%.
Said that the overnight index swap (OIS) market is pricing in about an 80% probability of a policy rate cut in December.
Also reported that the 30-year Treasury yield broke below the bottom of the box range, and additional strength is expected.

10-year yield, this month's low 4.03%

Bond derivatives market reflects 80% probability of a December cut

30-year yield falls below box range (4.24~4.30%)

U.S. Treasuries strengthened for a third consecutive trading day as dovish remarks by key officials of the U.S. central bank (Fed) significantly increased the likelihood of a December policy rate cut. Long-term issues led the gains, while short-term issues also maintained a stable trend supported by a recovery in auction demand.

The U.S. 10-year Treasury yield fell intraday to 4.03% on the 24th (local time), marking this month's low. In particular, the overnight index swap (OIS) market, which most sensitively reflects rate outlooks, is pricing in about an 80% probability of a 0.25% point cut at the December FOMC. OIS is an interest rate swap traded based on the short-term reference rate and is the indicator that most directly shows the market's expectations for the future path of interest rates.

Last week, John Williams, president of the New York Fed, said "there is room for rate cuts in the short term," and Fed Governor Christopher Waller also said that day, "I support a cut in December." Mary Daly, president of the San Francisco Fed, also agreed on the possibility of a cut in an interview with the WSJ.

The strength in U.S. Treasuries was most evident in long-term issues. The U.S. 30-year Treasury yield had been trading in a 4.24~4.30% range over the past week, but fell to the low 4.22%s on the day, breaking down below the box range.

Traders expect that the Bloomberg bond index month-end rebalancing scheduled for the 28th will bring additional buying into long-term issues. Newly issued 10-, 20- and 30-year securities were included in the index at 1 p.m. (local time) that day, and ETFs and mutual funds that track the index will need to adjust their portfolios.

The 2-year auction results reflected strong demand. In the $69 billion 2-year auction conducted a day early due to the Thanksgiving holiday, the bid yield was awarded at 3.489%. This is the same as the yield in the cash market immediately before the auction. The bid yield is the initial rate at which Treasury securities are actually awarded when the U.S. Treasury first issues a bond. In particular, this auction's bid-to-cover ratio recorded the highest level in the past three months.

New York = Shin-young Park, correspondent nyusos@hankyung.com