Bond Report: Treasury yields tick lower as investors gear up for U.S. private-sector jobs data

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U.S. Treasury yields retreated Wednesday as investors awaited a reading on U.S. private-sector employment, amid rising concerns that pockets of weakness in industry may contaminate the rest of the American economy.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.89%   was down 1.9 basis points to 1.625%, while the 2-year note rate TMUBMUSD02Y, -2.06%   shed 4.4 basis points to 1.512%. The 30-year bond yield TMUBMUSD30Y, -0.40%   edged lower by 1.3 basis points to 2.093%.

What’s driving Treasurys?

Automatic Data Processing Inc. will release its private-sector employment report at 8:15 a.m. Eastern. Economists polled by Econoday estimate that private-sector employment for September will come in at 152,000.

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.

Analysts say the contraction of the manufacturing sector may spell trouble for the broader U.S. economy, which has so far managed to keep the impact of the trade war at bay.

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 68%, 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 market remained convinced that another quarter-point (Fed) reduction may be served by December, and the disappointment in the ISM may have prompted participants to add to those bets. Today, they even assign a 63% probability for another cut to be delivered at the next meeting, scheduled for October 29th-30th,” wrote Charalambos Pissouros, senior market analyst at JFD Group.

“What could drive that percentage higher may be a disappointing employment report on Friday. We may get a hint on how the labor market may have performed during September from today’s ADP report. That said, we repeat for the umpteenth time that the ADP number is far from a reliable predictor to the NFP print,” said Pissouros.