US yields slump as Fed's Powell gives clear signal on rate cuts
Fed's Powell says "time has come" to cut rates
U.S. rate futures price in higher odds of 50 bps cut in Sept
U.S. 2-year, 10-year yield on pace for biggest daily fall in three weeks
U.S. 2/10 yield curve bull steepens as easing priced in
Adds new comment, Fed's Goolsbee's remarks, graphic, updates prices
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 23 (Reuters) -U.S. Treasury yields sank acrossthe board on Friday after Federal Reserve Chair Jerome Powell, in prepared remarks, delivered his strongest signal yet that interest rates are coming down most likely at the next policy meeting in September.
The benchmark 10-year yield fell 6.1 basis points (bps) to 3.801% US10YT=RR. It was on track to post its largest daily decline in nearly three weeks.
U.S. 30-year yields slid 4.2 bps to 4.094%US30YT=RR.
On the short end of the curve, the two-year yield, which reflects interest rate expectations, dropped 9.7 bps to 3.913% US2YT=RR, on pace for its biggest daily fall since Aug 2nd.
In a highly-anticipated speech, Powell said "the time has come" for the Fed to cut interest rates amid rising risks to the job market even as inflation was in reach of the U.S. central bank's 2% target. He spoke at the Kansas City Fed's annual economic conference in Jackson Hole, Wyoming.
"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," Powell said.
Traders increased bets for a bigger rate cut in September following Powell's speech, with the fed funds futures now pricing in a 37% chance of a 50-bp cut next month, up from about 25% late on Thursday. Traders are also pricingin about 106 bps of cuts by the end of the year.
"Powell very confidently ratified what the market is pricing in...It was also very clear from his speech that there's more focus on the labor market more than inflation going forward," said Vishal Khanduja, co-head of Broad Markets Fixed Income at Morgan Stanley Investment Management in Boston.
He added that the disinflationary trend in the economy remained intact, with inflation heading towards the Fed's 2% inflation target
"Until now, the question was: when is the first cut, with the cut being very data-dependent. Now I think they're tying the data dependence to the pace and magnitude of cuts going forward. That's a slight shift there."
Chicago Fed President Austan Goolsbee, who is not a voter this year on the Federal Open Market Committee, also added to Powell's dovish rhetoric on Friday. He said monetary policy is quite tight and is no longer aligned with current economic conditions.
(Powell's) speech was cautiously optimistic, suggesting that inflation is on a sustainable path back to the target without necessitating a sharp increase in unemployment," wrote Dan Siluk, head of global short duration and liquidity at Janus Henderson, in emailed comments.
"This may reassure investors about the potential for a soft landing. Risk markets – equities and credit – are firmer after the speech."
Following Powell'sunequivocal signal, the U.S. yield curve bull-steepened, or narrowed its inversion, with the yield spread between two- and 10-year notes at falling to as low as minus 9.9 bps, the tightest gap in a week, and downfrom minus 15.8 bps late on Thursday. The curve briefly turned positive on Aug. 5.
A bull steepener, a scenario in which short-term rates are falling more steeply than the long end, typically foreshadows a Fed easing cycle. The belief is that yields on the front end of the curve have peaked as the expected next move by the Fed is to cut rates.
US yield curve https://reut.rs/3YXv6NU
Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama, Ana Nicolaci da Costa and Nick Zieminski
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