2-year Treasury yield falls to lowest since September 2017

Treasury yields fell Wednesday after dovish speeches by senior Federal Reserve officials helped spur expectations for the U.S. central bank to embark on a more aggressive easing path.

The two-year note rateTMUBMUSD02Y, -1.38%, sensitive to expectations for Fed policy, slipped 3 basis points to 1.436%, its lowest since September 2017. The 10-year Treasury note yieldTMUBMUSD10Y, +0.63% fell 1.3 basis points to 1.456%, while the 30-year bond yieldTMUBMUSD30Y, +1.14% climbed 3.9 basis points to 1.989%. Bond prices move in the opposite direction of yields.

See: All-time low stands as last hurdle for 10-year Treasury yield plunge

The U.S. central bank had several officials speak ahead of the blackout period before the Sept. 17-18 meeting. New York Fed President John Williams saw a less ‘rosy outlook’ for the U.S. economy, while Minneapolis Fed President Neel Kashkari said the U.S. central bank may have to act if recession warnings continue to flash.

Market expectations for a more aggressive easing schedule ticked higher Wednesday. Traders’ assessment of the chance of a 50-basis-point rate cut this month rose to 10%, from nothing a week ago, according to CME Group data.

In economic data, the Fed’s Beige Book reported that activity in the services sector was either steady or improving, as business owners remained optimistic about the near-term economic outlook despite uncertainty from U.S.-China trade tensions.

Demand for government paper initially softened Wednesday after the Hong Kong government took measures that helped ameliorate geopolitical uncertainty around protests in the city. Hong Kong leader Carrie Lam said she would withdraw the China extradition bill and launch an independent study into the underlying social issues that helped to trigger the demonstrations.

Still, some noted that Lam had only agreed to one of five demands issued by protesters, which include an inquiry into police brutality and universal suffrage for the territory, making it unclear if the concession would sate the anger of protesters.

Asian equity bourses saw a relief rally. The Hong Kong Hang Seng Index HSI, +3.90% gained 3.9% on Wednesday, its biggest daily rise in 10 months.

“The dip-bought nature of Wednesday’s price action reinforces the notion that there still exists untapped demand for Treasurys even at levels within a few basis points of the local yield extremes,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a note.

“Violence might ease in Hong Kong, but the protests are likely to continue until we see the other four demands met,” wrote Edward Moya, senior markets analyst at OANDA.

“Beijing’s concession here appears to have happened too late and we may just see temporary reprieve with Hong Kong assets,” said Moya.

European government bonds sold off after some policy makers at the European Central Bank, including Klaas Knot, disputed the need for additional asset purchases. Investors have been expecting the ECB to go forward with a stimulus package at its September meeting.

At her confirmation hearing, nominee for ECB president Christine Lagarde said she would review the use of ECB policy tools such as negative interest rates and its bond-buying program.

The 10-year German government bond yieldTMBMKDE-01Y, +1.07% climbed 4.7 basis points to negative-0.675%.

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