Short-Term Rates Plunge Nearly 30bps Amid Recession Fears

Traders Expect Rate Cuts in All Three Remaining Fed Meetings This Year, with at Least One of 50 Basis Points.

Global fixed-income markets are experiencing a buying rally as investors seek refuge amid signs of a weakening U.S. economy—a trend that had already been anticipated but was further confirmed today by the non-farm payrolls report.

Being the most sensitive to upcoming Federal Reserve moves, the yield on the two-year U.S. Treasury bond fell by 27.5 basis points (bps) to 3.69%, its lowest level since May 4, 2023. Bond yields move inversely to their prices.

Investors rushed to sell off stocks worldwide, while the global dollar lost support due to lower returns on deposits. In Chile, the yields on Treasury bonds in dollars dropped by 22.4 bps to 4.87% on the two-year segment.

Fixed-income securities traditionally perform well during recessions, and economic growth signals have shown weakness throughout the month.

The yield on the 10-year U.S. Treasury bond, which reflects broader economic growth expectations and serves as a risk-free rate benchmark for valuation models worldwide, fell by 15.9 bps to 3.82%, its lowest level since the end of last year.

A look at financial derivatives reveals how expectations for the Federal Reserve’s policy path have shifted: swap traders today began pricing in a total of 118 bps in rate cuts for the federal funds rate by 2025, up from 85 bps.

This shift indicates that traders not only expect rate cuts in all three of the Fed’s remaining meetings this year but also anticipate that at least one of those cuts will be 50 bps—more substantial than the 25 bps cuts per meeting that were widely expected earlier this week.

Non-farm payrolls were not the only negative data released this Friday. Factory orders fell by 3.3% month-over-month in June, a tenth of a percent more than expected, and durable goods orders were revised downward, marking a monthly decline of 6.7%.

The ISM manufacturing index, jobless claims, ADP payrolls, unit labor costs, and construction spending all pointed in unison this week to declining inflationary pressure, accompanied by a slowdown in economic activity.