US Treasury market extends two-day rally on recession worries

Shorter-maturity Treasury yields fell another 10 basis points for the second straight session on Friday as recession worries dominated sentiment in the US and eurozone bond markets.Benchmark Treasury yields across the two- to five-year sector led market gains, before consolidating ahead of an S&P Global survey of purchasing managers for US services and manufacturing due at 9:45am in New York. Expectations are that activity will remain above 50, a threshold that determines contraction and expansion. The five-year fell nearly 12 basis points to 2.86% after tumbling 18 basis points on Thursday on weaker-than-expected data and after the European Central Bank closed the era of negative interest rates.A string of weaker than expected data on Thursday was the catalyst for a solid Treasury rally, led by the five-year note. That tone extended overnight for the Treasury market that followed in the slipstream of a big rally in eurozone bonds. Treasury yields lagged declines of some 20 basis points seen in eurozone debt after a survey of purchasing managers by S&P Global dropped to a 17-month low in July, dipping beneath the level that signals a contraction.The Treasury rally has gathered pace while the market remains priced for a second straight 75 basis-point hike at next week’s Federal Reserve meeting, a shift that would push the upper band of its policy rate to 2.5%. The central bank is likely to then slow the pace of interest-rate increases after front-loading policy next week, economists surveyed by Bloomberg said.The two-year Treasury note tumbled 11.5 basis points and briefly eased below 3% for the first time since July 6. The 10-year lagged the front end with a drop of 7 basis points to 2.80%, a level that marked the benchmark’s closing low set in early July. The 30-year bond was 3 basis points lower at 3.01%, and has not traded below 3% since late May. The Treasury is also set to sell two- and five-year notes next week before the Fed decision arrives, potentially capping gains in the current “belly-led rally,” according to William O’Donnell, strategist at Citigroup Inc.