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US 10-year yields fall as Fed cuts expectations rise slightly

The yield on the 10-year US Treasury fell sharply overnight, marking the most substantial one-day decline since last December. This sharp decline was triggered by disappointing economic data, revealing a contraction in manufacturing activity for the second straight month. This hint of a cooling economy slightly lifted optimism among investors, as the Fed is still on track to ease monetary policy this year.

Currently, the probability of an initial interest rate cut in September has risen to nearly 60%, according to Fed fund futures. In addition, expectations for a total of two rate cuts by the end of the year have also increased, now standing at 52.8%. However, these speculations could change dramatically depending on the results of upcoming economic reports, including ISM services data and non-farm payrolls later this week.

Technically, as long as the 4,318 support holds, the 10-year yield’s retracement from 3,780 is still in favor of an extension to 4,730 at a later stage. However, as this rise is seen as the second leg of the corrective pattern from 4,997, strong resistance should be seen below to limit the upside. The sustained break of 4,318 will indicate a short-term reversal and turn bearish in outlook.