Treasury yields experienced a decline in early Monday trading as investors eagerly anticipated a crucial week filled with significant events. These include the Federal Reserve’s policy decision, information on the U.S. government’s borrowing needs for the first quarter, and the release of the December jobs report.
Middle East Tensions Heighten
Amidst these important developments, investors are also closely monitoring the situation in the Middle East. The United States has promised to retaliate following a drone attack over the weekend that resulted in the death of three U.S. troops in Jordan. This incident marks a significant escalation in tensions.
- The yield on the 2-year Treasury note (BX:TMUBMUSD02Y) ended last week at 4.365%. As yields and debt prices move inversely, this decline is notable.
- The 10-year Treasury note (BX:TMUBMUSD10Y) yielded 4.104%, down from 4.159% as of 3 p.m. ET on Friday.
- The yield on the 30-year Treasury bond (BX:TMUBMUSD30Y) also experienced a decrease, falling to 4.343% compared to late Friday’s 4.388%.
Today, the U.S. Treasury Department is set to announce its revised forecast for first-quarter borrowing along with an initial estimate of its second-quarter needs. Wednesday will bring further details regarding auction schedules and other pertinent information.
Wall Street Anticipates Lower Borrowing Needs
It is worth noting that Wall Street is anticipating a downward trend in Treasury’s borrowing needs between now and June.
These forthcoming events are likely to heavily influence market dynamics moving forward.
The Fed’s Policy Meeting and Expected Rate Cuts
The Federal Reserve will be concluding its two-day policy meeting on Wednesday afternoon. While it is widely expected that the central bank will maintain the fed-funds rate at its current range of 5.25% to 5.5%, investors will be closely watching the policy statement and paying special attention to remarks made by Fed Chair Jerome Powell. These comments will provide clues regarding the timing of any anticipated rate cuts.
According to the CME FedWatch tool, traders in fed-funds futures have factored in a slightly higher than 50% chance of a quarter-point cut by the Fed’s meeting on March 20th. Additionally, they have also priced in a better than 50% chance that the fed-funds rate will decline to a range of 3.75% to 4% by December.
Focus on December Jobs Report and Oil Prices
In addition to the Fed’s policy meeting, market participants will also be closely observing the release of the December jobs report, scheduled for Friday. This report will be important in determining whether there are any signs of a cooling labor market.
Traders will also keep a keen eye on oil prices, particularly U.S. CL00, +0.15% and global BRN00, +0.08% crude benchmarks. These benchmarks experienced a rally last week, reaching their highest levels since November. The rally was primarily driven by concerns over tensions in the Middle East and U.S. production outages caused by cold weather.
Although oil futures initially spiked in Asian trading hours in response to a drone attack and U.S. military fatalities, they later retreated.
Analysis by Market Analysts
Market analysts at KBC Bank in Brussels have expressed their opinion on Powell’s potential impact on market sentiment. They believe that he is unlikely to alter the current market sentiment due to the economy’s strong performance and favorable inflation trends. In their client note, the analysts stated, “The Fed chair against that background probably isn’t in the mood for being outright hawkish. We think that anything bar the latter will prolong the dovish tide in markets.”
This analysis suggests that Powell’s comments will likely align with market expectations and contribute to the continuation of a dovish outlook.