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Investors' Reassessment of Fed Drags Yields Below 2%


U.S. government bond prices rose Thursday, after the Federal Reserve cut interest rates while providing mixed signals about the course of monetary policy.

The yield on the benchmark 10-year Treasury note fell below 2% for the first time since early July, trading at a recent 1.952%, according to Tradeweb, down from 2.034% Wednesday.

Yields, which decline when bond prices climb, slid and the dollar gained following the Fed decision and press conference. Weak economic data and a decline in oil prices Thursday then boosted concerns about the outlook for global growth and the Fed’s ability to stimulate inflation. A strengthening dollar tends to weigh on global growth while also sapping inflation by making imported goods less expensive.

Yields began falling early in the session, with German government debt yields dropping to fresh lows after reports showed continued sluggish manufacturing data from Germany and the eurozone. They extended the decline after the Institute for Supply Management said Thursday that U.S. manufacturing activity slowed in July to the lowest since before the 2016 election.

Demand accelerated after the 10-year Treasury yield fell below 2%, which some investors see as an important level.

“Breaking through 2% seems to have brought in some buyers,” said Don Ellenberger, head of multisector strategies at

Federated Investors
.

The gap between the yields on five-year Treasury inflation-protected securities and fixed-coupon U.S. government debt, which reflects the bond market’s expectation for the average rate of inflation through 2024—fell to about 1.5% from roughly 1.6% Wednesday, according to Tradeweb.

With economic growth decelerating it will be difficult for the Fed to revive inflation or boost expectations for consumer prices to rise, said Dec Mullarkey, a managing director at SLC Management. “They haven’t moved the needle—there’s a lot of skepticism.”

Analysts said investors are questioning how much a one-quarter-percentage-point drop in borrowing costs will cushion a broader slowdown driven by concerns about trade, which affects business investment and can hamper companies with global supply chains—factors outside the Fed’s control.

Some investors are worried about how quickly Fed Chairman Jerome Powell can move to provide additional support for the economy after two Fed officials dissented in Wednesday’s vote to reduce rates, analysts said.

The dollar held steady Thursday, with currency investors interpreting the Fed’s move as a fine-tuning of the economy rather than a signal of a prolonged cycle of rate cuts, analysts said. The WSJ Dollar Index recently declined by less than 0.1% after rising 0.2% in earlier trading.

Federal funds futures show that investors are putting odds of about 45% that the Fed lowers rates two more times this year. That is down from about 55% a week ago, according to CME Group data.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

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