US two-year yield falls to lowest since September 2022
U.S. 2/10 yield curve hits steepest since July 2022
Fed funds futures price in 61% chance of 50-bp cut
Focus on U.S. retail sales ahead of Fed decision on Wednesday
Updates as of 15:55 UTC
By Matt Tracy
WASHINGTON, Sept 16 (Reuters) -The U.S. Treasury two-year yield fell to its lowest in two years on Monday, while the 10-year's yield eased for a second straight session, as investors weighed the odds of a half-percentage-point interest rate cut by the Federal Reserve this week.
In afternoon trading, benchmark 10-year Treasury yields US10YT=RR fell 2.8 basis points to 3.621%, while U.S. two-year yields US2YT=RR fell to 3.528%, their lowest since September 2022. They were last down 1.5 bps at 3.561%.
Treasury yields, which move inversely to prices, declined last week after growing speculation around a 50-basis-point rate cut at the Fed's Sept. 17-18 rate setting meeting.
On Monday, New York Federal Reserve President Bill Dudley reiterated his calls last week for the Fed to make a big cut on Wednesday. In an opinion piece on Bloomberg News, the former Fed official noted that the Fed's dual mandate of price stability and maximum sustainable employment has become more balanced, which suggests monetary policy should be neutral - neither restricting nor boosting economic activity.
The yield curve, meanwhile, steepened for a third straight session, with the spread comparing 10-year and two-year yields US2US10=TWEB widening to as much as 10 bps on Monday. That's the steepest since July 2022, with the curve last at 5.8 bps.
Investors track the yield curve for signals on the U.S. economic outlook.
The probability of a 50-bp easing was last seen at 61% on Monday, up from 45% on Friday, according to LSEG calculations.
A key factor heading into this week's Fed meeting will be how the central bank handles these market expectations, even as inflation has been cooling and the labor market has shown signs of weakness.
"While we're still in the 25-bp camp, we'll concede that the more aggressively the market prices in 50 bp, the more compelled the Fed will be to follow-through with such a move," Ian Lyngen, director of fixed income strategy at BMO Capital Markets, wrote in a research note on Monday.
Some in the market were skeptical, however, about whether such a large cut was necessary as recent signs point to still-sticky inflation, and uncertainty swirls around November's U.S. presidential election.
"I don't think 50 (basis points) is warranted, because 25 gives them more optionality to say, 'Hey, we can do more, but it's an election year,'" said Jack McIntyre, portfolio manager for global fixed income at Brandywine Global Investment Management.
August retail sales data, scheduled for release on Tuesday, will perhaps be the most influential economic data point heading into the Fed's decision on Wednesday, market participants said.
Recent reports have pointed to a slowing economy, contributing to a market consensus that the Fed will announce a rate cut, whether 25 bps or 50 bps, after this week's meeting.
The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.09%, indicating the market sees inflation averaging about 2.1% a year for the next decade.
"We should take a step back and remember that (the calls for a 50 bp cut are) informed by a pretty significant slowdown in the overall pace of economic activity," said Michael Lorizio, senior fixed income trader at Manulife Investment Management.
"How far they're going to go towards normalizing rates will ultimately matter more, not only for the outright level of (yields), but also how we try to figure out what the appropriate shape of the curve should be."
US yield curve https://reut.rs/3XHDgc6
Reporting by Matt Tracy; editing by Jonathan Oatis
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