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Bond yields inched lower early Monday, though benchmark Treasurys remained above 4% after traders trimmed expectations for Federal Reserve rate cuts in 2024.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell by 2.1 basis points to 4.383%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
eased 1.1 basis points to 4.034%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
dipped less than 1 basis point to 4.195%.
What’s driving markets
The benchmark 10-year Treasury yield — which just after Christmas dipped below 3.8% — continued to trade above the 4% level after investors recalibrated bets on the pace of Federal Reserve interest rate cuts this year.
A week ago the market was pricing in an 88.5% chance that the central bank will trim borrowing costs by at least 25 basis points at its March meeting.
That figure on Monday was down to 62.8% after a stronger-than-expected jobs report at the end of last week and after Dallas Fed President Lorie Logan on Saturday said it was too early to take rate increases off the table as inflation remained above the 2% target and “a premature easing of financial conditions could allow demand to pick back up.”
Indeed, the central bank now is expected to take its Fed funds rate target back down to around 4.05 by December 2024, according to 30-day Fed Funds futures. Just a week or so ago, it was hoped the target would be 3.85% by the end of this year.
Logan’s peer Raphael Bostic, President of the Atlanta Fed, is due to make comments at 12 noon Eastern on Monday.
Meanwhile bond markets will be on tenterhooks for the December consumer prices index report, which will be published on Thursday. Economists expect headline annual inflation to be 3.3%, up from November’s 3.1%, but core inflation — which strips out volatile items like food and energy — to be 3.8%, down from 4%.
Otherwise, it’s a thin start to the week for economic data, with the New York Fed’s survey of consumer expectations released at 11 a.m. Monday, and the consumer credit data for November released at 3 p.m. Eastern.
What are analysts saying
“For those seeking macroeconomic clarity, the situation remains pretty elusive,” said Stephen Innes, managing partner at SPI Asset Management. “While there is a plausible argument that the U.S. labor market has effectively normalized, uncertainties persist in a market characterized by ongoing concerns about an indeterminate macroeconomic landscape amid the long wait for a recession that may or may not ever arrive — hinting at the potential for a volatile year ahead.”
“Amid the ongoing inflation downswing, the Fed’s mechanical rate cut theory will be tested this week with the release of both the U.S. CPI and PPI reports. The good news is that underlying U.S. price pressures likely continued to recede in December, supporting the Federal Reserve’s optimism about the path for inflation,” Innes added.
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