NEW YORK (CNN/Money) -
Treasury yields recorded their biggest drop in two months on Tuesday after dismal U.S. consumer confidence data convinced many investors the Federal Reserve would cut interest rates as soon as next week.
Two-year yields plunged as much as 15 basis points to break back below the 1.75 percent fed funds rate, a rare event which has heralded rate cuts in the past.
Around 4:00 p.m. ET, the two-year note gained 8/32 to 100-22/32, yielding 1.78 percent from 1.90 percent Monday. The five-year note rose 23/32 to 101-30/32, yielding 2.82 percent from 2.98 percent late Monday.
The benchmark 10-year note jumped 1-4/32 to 103-13/32 to yield 3.95 percent from 4.09 percent Monday. The 30-year note gained 1-9/32 to 105-9/32 to yield 5.02 percent from 5.11 percent late Monday. Treasury prices and yields move in opposite directions.
Investors had been anticipating a weak result from the Conference Board but the actual outcome was far worse than even the most bearish forecast. The main confidence index swooned to 79.4 in October from 93.7 the month before, its lowest reading since November 1993.
"You should expect the Fed to cut rates on November 6, probably by 50 basis points, and for yields to revisit their historic lows," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets.
Yields had hit four-decade lows early this month only to rise sharply when equities rallied and Fed speaker after Fed speaker insisted policy was already accommodative enough to ensure a recovery.
But yields began to fall again as the flow of economic data deteriorated and two U.S. newspapers suddenly carried reports that the Fed was swinging toward easing.
Running short on patience
For bond bulls, Tuesday's sentiment data should help shove the Fed in the right direction.
"I reckon Fed easing next Wednesday is a done deal and 50 basis points is more likely than 25," said Rory Robertson, U.S. economist for Australian house Macquarie Equities (USA), who has been consistent in tipping a cut before year-end.
"Today's dramatic drop in the high-profile confidence measure leaves little scope for Fed hawks to keep counseling patience on policy," he said.
There was a chance that coming jobs data could delay an easing if they proved much stronger than expected, but that seemed unlikely given the stagnant picture painted by other indicators such as jobless claims and the help wanted index.
The October payrolls report is due Friday, along with the influential ISM manufacturing survey.
If Fed Chairman Alan Greenspan is considering a rate cut he has a chance to guide market thinking later Tuesday when he gives a speech, though the subject of education would seem to limit the opportunity to talk on monetary policy.
Greenspan speaks before the Institute of International Education annual awards dinner at 7:00 p.m. ET.
In the currency market, the dollar weakened against both the euro and the yen following the news.
At 4:00 p.m. ET, the euro bought 98.35 U.S. cents, down from 98.47 cents late Monday. The dollar bought ¥122.98, down from ¥123.36 Monday.
-- from staff and wire reports