NEW YORK, Aug 5 (Reuters) - U.S. Treasury yields dropped to more than one-year lows on Monday and a closely watched part of the Treasury yield curve turned positive for the first time in two years on increasing concerns that the United States may be heading into a recession.
An unexpected increase in the employment rate and fewer than expected jobs gains in July’s employment report on Friday sparked a rapid repricing of expectations on when and how far the Federal Reserve will cut interest rates.
The U.S. central bank is now seen as possibly cutting interest rates before its next scheduled meeting in September, or making a larger cut then to stave off a severe economic downturn.
"There is more convincing evidence that there could be more potentially negative ramifications from the Fed being as restrictive as it was for as long as it has been," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.
"Conversations about an inter-meeting rate cut have picked up," Lyngen added, but "we don’t think the Fed’s going to cut inter-meeting. I think the biggest debate is whether or not they go 25 or 50 (basis points) in September."
Traders are now fully pricing in a cut of at least 50 basis points in September, according to the CME Group's FedWatch Tool. That was seen as only having 11% odds a week ago. In total, 131 basis points of easing is priced in by year-end.
European stocks joined a global selloff Monday - but in calmer fashion than Asia.
Chicago Federal Reserve Bank President Austan Goolsbee on Monday said while the U.S. employment data on Friday was weaker than expected, it does not look like a recession, but that Fed officials need to be cognizant of changes in the environment to avoid being too restrictive with interest rates.
Tumbling stock markets globally and concerns about increasing geopolitical tensions in the Middle East added to demand for the safe haven U.S. government debt.
Yields on interest rate sensitive two-year notes were last down 14.2 basis points at 3.73% and got as low as 3.654%, the lowest since April 2023.
Benchmark 10-year note yields dropped 11.2 basis points to 3.684% and reached 3.667%, the lowest since June 2023.
The gap between two- and 10-year Treasury notes was last at minus 4.6 basis points, after earlier reaching 1.50 basis points. It is the first time it has turned positive since July 2022.
An inversion in the yield curve typically indicates that a recession is likely in the next one-to-two years, though this inversion has lasted longer than in previous episodes.\The curve usually turns positive before a downturn begins.
Reporting By Karen Brettell; Additional reporting by Harry Robertson and Ankur Banerjee; Editing by Nick Zieminski
