Bond Report: 10-year Treasury yield falls below 1.60% as stock-market selling spurs haven demand

U.S. Treasury yields fell sharply Wednesday after growing worries about the health of the American economy drew investors into government bonds at the expense of stocks.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -2.73% tumbled 5.7 basis points to 1.587%, while the 2-year note rate TMUBMUSD02Y, -4.39%, sensitive to expectations for monetary policy, shed 8.2 basis points to 1.474%. The 30-year bond yield TMUBMUSD30Y, -0.71% fell 3.6 basis points to 2.069%.

What’s driving Treasurys?

Stock-markets are being assailed by worries that the recent spell of poor economic data could point to deeper domestic economic troubles, even as analysts expect gross domestic product to record a 2% growth rate for the full year. The deteriorating investor sentiment spurred inflows into haven assets like gold, the Japanese yen and U.S. government paper.

The S&P 500 SPX, -2.05% and the Dow Jones Industrial Average DJIA, -2.11% are both on pace to shed more than 2% Wednesday, FactSet data show.

Automatic Data Processing Inc. ADP, -2.76% reported private-sector employment fell to 135,000 in September, below the 152,000 forecast from economists polled by Econoday. This comes a day after disappointing data from the U.S. ISM manufacturing index in September weighed on investor sentiment, drawing investors into the safety of government bonds. The ISM gauge fell to 47.8, its worst reading since June 2009. Any number below 50 indicates factory activity is shrinking.

Also published Tuesday, the JPMorgan IHS global manufacturing index for September remained below 50, the dividing line between expansion and contraction, for a fifth straight month.

As a result, market participants are raising their expectations for additional rate cuts from the Federal Reserve, which cut interest rates by a half percentage point so far this year. The probability of a quarter point cut at the central bank’s meeting on Oct. 30 ticked up to 78%, based on trading for fed fund futures.

Geopolitical jitters also came to the fore after British Prime Minister Boris Johnson announced a new Brexit proposal in a last-ditch effort to reach a deal to leave the European Union before the end of the month. At a speech at the Conservative Party’s annual conference, Johnson said he was willing to pull the U.K. out of the economic bloc without a deal.

What did market participants’ say?

“The impact in the data is being felt, and the U.S. economy is beginning to throw off some worrisome indicators. A weaker than expected payrolls number will only add fuel to the fire,” wrote Kevin Giddis, chief fixed-income strategist at Raymond James.

“The current default trade is back to [Treasurys], and depending on what numbers we see on Friday, that trade could be favored even more,” said Giddis.