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Treasury yields were little changed to higher on Tuesday afternoon, with few catalysts to move the market on a day devoid of major data.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
advanced 3 basis points to 4.406%, from 4.376% on Monday. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 6.1 basis points to 4.154%, from 4.093% on Monday. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
climbed 7.1 basis points to 4.386%, from 4.315% on Monday.
What’s driving markets
One-month through 30-year yields stabilized as traders wait for fresh information that may challenge the current consensus on the economy’s trajectory and Federal Reserve monetary policy.
Treasury’s $60 billion auction of 2-year notes on Tuesday afternoon produced “spot-on” results and “decent demand,” with indirect bidders taking an above-average 65.3%, according to Tom di Galoma, co-head of global rates trading for BTIG in New York.
Markets are pricing in a 97.4% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.50% at its meeting next Wednesday, according to the CME FedWatch Tool. The chance of a 25-basis-point rate cut by March is now seen at 40.5%, down from 75.6% a month ago. The central bank is mostly expected to take its fed-funds rate target back down to 4%-4.25% or lower by December.
Overseas, the Bank of Japan left its policy unchanged on Tuesday, keeping its short-term rate at minus 0.1% and maintaining its yield-curve control parameters. In addition, Chinese officials are said to be considering measures to stabilize the country’s stock market, Bloomberg News reported, citing people familiar with the matter.
Thursday brings a preliminary reading on fourth-quarter U.S. GDP growth, which is expected by economists to come in at an annual pace of 2% — down from a 4.9% rate in the third quarter. On Friday, the Fed’s preferred inflation gauge, the personal-consumption expenditures price index, is released for December.
What investors are saying
“Somewhat quietly, market expectations of inflation in the coming years have surged during the past few weeks,” said Brent Schutte, chief investment officer of Northwestern Mutual Wealth Management Co. “The five-year, five year forward inflation breakeven rate — a measure watched by the Fed — reached a low in late December of 2.13 percent but has since risen to 2.42 percent as of last Friday.”
“This rate reflects market expectations of the average expected inflation over the five-year period that begins five years in the future,” Schutte wrote in a note. “While the rate remains within striking distance of the Fed’s stated inflation target, it is clearly moving in the wrong direction. We believe that with the disinflationary process stalling, the job market still tight, and wage growth remaining elevated, any loosening of financial conditions that occurs due to improving expectations resulting from the Fed’s softened stance could force the FOMC to keep rates higher for longer, which we believe increases the odds of a recession in 2024.”
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