U.S. Treasury yields back in the 3% range… economic slowdown, possibility of rate cuts at work [Bonds+]

Fed rate-cut expectations also spur bond buying

Technical buying also flows in amid stabilizing investor sentiment

The yield on the U.S. 10-year Treasury has fallen back below 4%. Fears of an economic slowdown have increased due to the prolonged U.S. federal government shutdown, and the likelihood of a rate cut by the U.S. central bank (Fed) at the end of October has risen, drawing a wave of bond buying. In addition, expectations of easing U.S.-China trade tensions have prompted investors to move into safe-haven assets rather than risk assets.

10-year at 3.98%… prolonged shutdown raises economic slowdown concerns

On the 20th (local time), the U.S. 10-year Treasury yield fell 2bp (1bp is 0.01% point) to 3.982%, the 2-year to 3.459%, and the 30-year to 4.569%. Because bond yields move inversely to bond prices, this indicates strengthening bond buying.

The U.S. federal government shutdown marked its third week on Wednesday this week. With partial closures of federal agencies due to failure to agree on the budget, major economic indicators such as initial jobless claims and the consumer price index (CPI) have not been released.

Katie Nixon, CIO at Northern Trust, said, "A prolonged shutdown could slow quarterly GDP growth," and added, "However, this is a temporary delay and a subsequent recovery is likely."

Markets expect the Fed to cut its policy rate by 0.25% point at the Federal Open Market Committee (FOMC) meeting next week. A rate cut is a factor that would lower bond yields. Accordingly, investors are buying long-term Treasuries in advance to seek price appreciation.

Easing U.S.-China trade tensions… stokes preference for safe-haven assets

Recently, markets have also focused on expectations that U.S.-China trade tensions will ease. As the likelihood of a 100% additional tariff on Chinese goods (scheduled to take effect on November 1)—announced by the Trump administration—diminished, upward pressure on the dollar eased and Treasury buying resumed.

U.S. Treasury Secretary Scott Bessent said at a CNBC event, "I will meet with Chinese Vice Premier He Lifeng in Malaysia later this week to prevent escalation of tariffs," and President Trump also said, "Tariffs of that level (100%) are unsustainable."

In the bond market, the 4% area of the 10-year yield is seen as a psychological resistance level. The flow of technical buying by institutional investors whenever yields approached 4% also accelerated this decline, analysts say.

The September consumer price index (CPI), to be released on the 25th, is expected to be a key indicator for gauging the extent of further Fed rate cuts. Market consensus is around 3.0% year-on-year, and if it is lower than expected, some say bond yields could fall further.

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