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U.S. Bond Yields Rise as Traders Adjust Fed Rate Cut Expectations



The yield on U.S. Treasury bonds saw an increase on Wednesday as traders adjusted their expectations for a swift reduction of borrowing costs by the Federal Reserve in 2024.

Key Details

  • The yield on the 2-year Treasury bond, BX:TMUBMUSD02Y, added 1.7 basis points and reached 4.349%.
  • The yield on the 10-year Treasury bond, BX:TMUBMUSD10Y, rose by 4 basis points, reaching 3.974%.
  • The yield on the 30-year Treasury bond, BX:TMUBMUSD30Y, climbed by 3.5 basis points and reached 4.112%.

Market Trends

The market started off the year with doubts about the likelihood that the Federal Reserve will begin cutting interest rates as early as March and make a total reduction of 150 basis points throughout the year.

The 2-year Treasury yield, which is highly influenced by Fed policy, increased to 4.35%, up from December’s closing rate of around 4.25%. Meanwhile, the 10-year yield, which is more focused on inflation trends, has risen from 3.88% to 3.98% over the same period.

According to the CME FedWatch tool, markets are currently pricing in the possibility of the Fed maintaining its benchmark rate within a range of 5.25% to 5.50% after its next meeting on January 31st.

Market Expectations Shift as Fed Rate Cut Probability Declines

The likelihood of a 25 basis point rate cut at the forthcoming Fed meeting in March has decreased to 75%, compared to 90.3% just a week ago. Investors are also adjusting their projections for future cuts, with only approximately five more 25 basis point reductions expected in 2024. Previously, the market foresaw six of such cuts, totaling 150 basis points.

This change in sentiment suggests that investors may have misunderstood the Federal Reserve’s intentions to swiftly lower rates in response to inflation approaching its target of 2%.

Market participants eagerly await the release of the minutes from the central bank’s December policy meeting, scheduled for 2 p.m. Eastern. Prior to that, Richmond Fed President Tom Barkin will deliver a speech at 8:30 a.m.

“While Powell hinted at the possibility of easing during his post-meeting press conference, Fed officials have since emphasized that immediate rate cuts are not imminent,” commented Oscar Munoz, chief U.S. macro strategist at TD Securities. He further added, “Therefore, we anticipate that this week’s minutes will demonstrate the FOMC’s reluctance to consider rate cuts at this time.”

On Wednesday, the U.S. economic updates will include the release of the job openings survey (JOLTS) for November and the December ISM manufacturing report, both scheduled for 10 a.m. Eastern.

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