New York

Treasury bulls are about to get some make-or-break US economic data, after investors’ quest for shelter drove yields to multi-year lows in a sign of growing conviction that a recession is ahead.

Ten-year Treasury yields have tumbled to just below 2.13 per cent, the lowest since 2017, after US President Donald Trump said he’d impose tariffs on all Mexican goods over illegal immigration. Coming on top of escalating US-China trade friction, the latest levy salvo helped 10-year Treasuries post the largest monthly rally since 2015.

Now some pivotal US economic releases — on manufacturing and employment — could cement or spoil the bullish narrative. Traders have gotten so gloomy on the growth outlook that they’re betting the Federal Reserve will cut its target rate by a half-percentage point by year-end. That’s further widened the divide between the market and policymakers, who have projected no move in 2019 and a quarter-point hike in 2020.

“Either things are slowing down and we’re easing — in which case we’re going to 1.5 per cent — or growth is at potential and there are downside risks, but that can keep rates at 2.4 per cent,” said Priya Misra, head of global rates strategy at TD Securities. Monday’s manufacturing gauge is “absolutely critical. If it falls lower, we’ve got more room to go on the rally.”

Haven demand has also pushed the 30-year yield below 2.6 per cent, to the lowest level since around the 2016 US presidential election. In Germany, 10-year bund yields fell to a record low of -0.213 per cent.

Targeting 2.4 per cent

Nevertheless, Misra is targeting a move back to 2.4 per cent on the US 10-year. The note is about 22 basis points below three-month rates, the most since 2007. An inversion of these rates has historically proven a strong signal of looming recession.

ISM manufacturing is forecast at 53 for May, up from a prior reading of 52.8, which was the weakest since 2016. That year was also the last time it was below 50, which would indicate contraction. The June 7 jobs report is expected to confirm that the labour market remains tight, with a 3.6 per cent jobless rate that would still be the lowest since 1969.

“The one thing we were comfortable with up until recently was that the US economy was growing okay,” Misra said. “That assumption is shaken if we get weaker ISM.”

Friday also saw Barclays Plc, JPMorgan Chase & Co. and NatWest Markets update their Fed views to project cuts in 2019. Barclays cited “deteriorating economic and financial conditions” resulting from worsening US trade relations with China and Mexico in its revision, which includes a call for a half-point reduction in September.

NatWest’s John Briggs sees 2 per cent as the next stop on 10-year Treasury yields.

“Why would China give concessions to Trump” when Mexico had a deal and he still threatened tariffs, said Briggs, head of rates strategy for the Americas. “Even if he comes back and doesn’t impose those tariffs, the surprise and the willingness to come out of left field, I think that’s going to linger.”