The US 2-year Treasury yield has dropped to its session low, following the release of ISM data and comments from Federal Reserve Chair Kevin Warsh. The yield eased to 4.18%, reflecting a 0.01 percentage point decrease. The decline comes amid reports that the US manufacturing sector contracted for the fifth consecutive month, as indicated by an ISM Manufacturing PMI of 48%. This contraction suggests weakening factory activity, possibly influencing short-term interest rate expectations. Warsh’s remarks focused on price stability, adding pressure to the market’s evaluation of potential Federal Reserve policy changes.

The drop in the 2-year yield is significant due to its sensitivity to anticipated Fed policy shifts. The recent ISM data and Warsh’s comments could be prompting market participants to reassess the likelihood of rate cuts in 2026. Current market data shows a 78% probability that no Fed rate cuts will occur by December 31, 2026, a figure unchanged from the previous day but slightly down from 79% a week ago.

Key Takeaways

• The 2-year Treasury yield’s decline appears consistent with market participants reassessing rate cut expectations for 2026.
• Warsh’s focus on price stability, amid ongoing inflation concerns, suggests potential shifts in Fed policy interpretation.
• Current market pricing suggests a 78% probability that no Fed rate cuts will happen in 2026, reflecting stability in these expectations.

What to Watch

Observers should monitor upcoming economic data releases and Federal Reserve communications for further indications of policy shifts. Any changes in the ISM data or comments from key Fed officials like Jerome Powell could influence market perceptions of rate cut probabilities. Additionally, updates to the Fed’s economic projections or unexpected geopolitical developments may also impact these expectations.

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