(Bloomberg) -- All it took was a classic bout of haven buying to wake up a slumbering Treasuries market and drive benchmark yields to the lowest in months.
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At a time when the US government shutdown has delayed key official readings on employment and inflation, jitters around regional banks' credit exposure jolted Treasuries last week, after yields had barely budged for days. The move came as an index of the lenders' shares slid the most since April's tariff-fueled market chaos.
As rattled investors piled in, the policy-sensitive two-year yield dipped below 3.4% to the lowest level since 2022, while the 10-year made its deepest push below 4% since April. It was the second round of haven-buying for Treasuries in October, after the reemergence of trade tensions sparked an even bigger rally the week before.
Already buoyed by signs of weakening employment conditions that have made a quarter-point Federal Reserve policy easing on Oct. 29 look like a given -- investors are locking in 4% yields for 10 years as a safety play given the rich valuation of equities and credit markets.
"Treasuries have worked as a great risk-off hedge over the last week," said Priya Misra, a portfolio manager at JPMorgan Investment Management. "Rates can fall further" on any additional credit worries or trade jitters, and the asset manager owns exposure in 5- to 10-year maturities, which give "the comfort to hold on to credits we like."
Even the 30-year Treasury has gained ground, countering worries of a global debasement trade given the hefty borrowing needs of major economies, which helped propel gold to a record above $4,000 an ounce.
Fed View
The trajectory for Treasuries from here largely depends on traders' expectations for how deeply the central bank will ultimately cut rates over the coming 12 months or so. In a speech last week, Fed Chair Jerome Powell pointed to the low pace of hiring and noted that it may weaken further.
The Fed resumed its easing cycle in September with a quarter-point reduction to a range of 4% to 4.25%. A market proxy for the so-called terminal rate for this cycle fell below a recent floor of 3% this month, and is approaching cycle lows from September 2024.
After Oct. 29, another quarter-point cut is priced in for December, and then potentially two more by mid-2026.