US yields dip ahead of notes auction, Fed minutes

U.S. Treasury yields were flat to lower in early trading on Wednesday as markets awaited an auction of 10-year notes and the release of minutes from last month’s central bank meeting.

Investors overwhelmingly expect the Federal Reserve to cut interest rates again later this month and yet again in December, in keeping with the Fed’s most recent projections, as the labor market shows signs of stalling.

However policymakers and market players say they are partly flying blind as a government shutdown, now in its eighth day, continues to block the release of official economic indicators.
Several key Fed members were due to deliver public remarks on Wednesday but it was unclear if any would offer clues as to the path of monetary policy.
Angelo Manolatos, a macro strategist at Wells Fargo, said the work stoppage in Washington tended to boost demand for U.S. fixed income.

“Historically, you tend to see Treasuries perform well during shutdowns,” he said, adding that a further deterioration in a weak labor market as shown by private-sector indicators could push yields out of their current range-bound pattern. “Labor market data is going to be king from now through the end of the year,” said Manolatos. The yield on the benchmark U.S. 10-year Treasury note was last down 2 basis points to 4.107%. The yield on the 30-year bond fell 2.4 basis points to 4.702%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 54.2 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 0.8 basis points to 3.564%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.419% after closing at 2.42% on October 7.

The 10-year TIPS breakeven rate was last at 2.352%, indicating the market sees inflation averaging about 2.4% a year for the next decade.

The U.S. dollar five-year forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.475%.