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Bond yields dipped early Wednesday as traders eyed economic data in coming sessions that may color the Federal Reserve’s thinking at next week’s monetary policy meeting.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dipped by 1.6 basis points to 4.322%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 2.6 basis points to 4.112%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
lost 2 basis points to 4.347%.
What’s driving markets
The 10-year Treasury dipped back towards the 4.1% level around which it appears to have found equilibrium following a rollercoaster ride in recent months.
Deutsche Bank noted that benchmark yields on Tuesday recorded their narrowest trading range of the year so far, suggesting investors have become more relaxed about the prospects for the economy and inflation, and the likely trajectory of Federal Reserve policy.
Markets are pricing in a 97.4% probability that the Fed will leave its benchmark interest rates unchanged at a range of 5.25% to 5.50% after its meeting on January 31st, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut by the subsequent meeting in March is priced at 51.3%, down from 88% a month ago, a decline that reflects some stronger economic data of late and push back on rate-cut optimism by Fed officials in recent weeks.
The central bank is expected to take its Fed funds rate target back down to around 4.06% by December 2024, according to 30-day Fed Funds futures.
Potential catalysts for Treasuries on Wednesday include the S&P flash U.S. services and manufacturing PMI reports for January due for release at 9:45 a.m. Eastern, and the Treasury’s auction of $61 billion of 5-year notes at 1 p.m.
Then the prospect for some yield volatility ramps up on Thursday with the release of the weekly U.S. jobless benefit claims, the reading of fourth quarter 2023 GDP and December durable goods orders.
And arguably the most important data point will come Friday, when the December PCE index, the Fed’s favored inflation gauge, will be published.
What are analysts saying
“The fourth quarter GDP report will not reflect much new information, but it will exemplify a ‘goldilocks’ quarter of both 2% growth and 2% inflation,” said Veronica Clark, economist at Citi.
“This will keep markets and Fed officials optimistic over the prospects of a sustained soft landing. But there were building signs of weakening in labor market data in the last months of 2023 and the key question of early 2024 will be if recently loosening financial conditions are enough to re-stimulate demand and avoid a near-term recession,” she added.
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