(Bloomberg) -- US Treasuries advanced after a weaker-than-expected gauge of service-sector activity boosted bets the Federal Reserve will cut interest rates this month.
The rally left yields lower by at least three basis points, with short maturities — more sensitive to Fed policy changes — falling the most. The two-year note's yield erased an increase of three basis points and fell by more than five basis points to to 4.12%, the lowest since Nov. 1.
With just two weeks remaining before the Fed's next policy decision on Dec. 18, the outlook for another quarter-point rate cut remains uncertain. Comments by Fed policymakers this week broadly show support for additional cuts, tempered by awareness of the risks of acting too quickly.
Fed Chair Jerome Powell, slated to speak at a conference Wednesday afternoon in New York, may offer clarity, however he also has said the decision will depend on the totality of economic data available at the time. That includes November employment data to be released Friday.
"The market is just waiting on Powell and the jobs number," said Kim Rupert, an economist at Action Economics. "We are priced for a rate cut on the 18th with the onus on the data to keep the Fed sidelined."
Federal Reserve Bank of St. Louis President Alberto Musalem, speaking earlier Wednesday, said pausing cuts may be appropriate as soon as this month, as the risks of cutting borrowing costs too quickly are greater than those of easing too little.
Treasury yields retreated from near session highs after the ISM services index for November fell more than expected, as did its employment component. Also Wednesday, the ADP Research Institute's gauge of private-sector job growth in November was weaker than economists estimated.
The Fed cut rates by a half-point in September and a quarter-point last month, and the market-implied odds of another quarter-point cut this month have improved to around 70%. Additionally, a cumulative 80 basis points of easing is priced in by the end of next year.
Mounting expectations for a December rate cut have driven a benchmark for US dollar interest-rate volatility to the lowest level in four months.
--With assistance from Edward Bolingbroke.
(Adds context and updates yield levels throughout.)
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