Bond yields fell on Thursday as the recalibration of expected Federal Reserve interest rate cuts continued to be the main focus for traders.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dropped 3.4 basis points to 4.329%. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 3 basis points to 4.079%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
eased by 1.7 basis points to 4.301%.
What’s driving markets
Some sturdy U.S. economic data of late — including a hotter-than-forecast retail sales report released Wednesday — alongside a concerted pushback by Fed officials against rate-cut expectations, pushed 10-year Treasury yields back above 4.1% midweek.
A small slice of that rise is being given back Thursday, ahead of U.S. economic updates including weekly initial jobless benefit claims, the January Philadelphia Fed manufacturing survey, alongside housing starts and building permits for December, all at 8:30 a.m. Eastern.
Fed officials making comments Thursday include Atlanta Fed President Raphael Bostic speaking on the economic outlook at 7:30 a.m. and again at 11:30 a.m.
The benchmark yield had been as low as 3.8% just after Christmas as investors hoped that falling inflation would allow the central bank to cut borrowing costs by up to 150 basis points this year, starting in March.
Now, markets are pricing in a 97.4% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st, according to the CME FedWatch tool.
But the chances of at least a 25 basis point rate cut by the subsequent meeting in March is priced at 63%, down from 73.2% a week ago.
The central bank is still expected to take its Fed funds rate target back down to around 3.98% by December 2024, according to 30-day Fed Funds futures.
The U.S. Treasury will auction $18 billion of 10-year TIPS, or inflation-protected securities, at 1 p.m.
What are analysts saying
“The big question for markets at the moment is whether 2024 to date is just an understandable hangover to an exceptionally good end to 2023 or a marker for a more challenging year ahead,” said Jim Reid, strategist at Deutsche Bank.
“We have corrected back a bit this week after a slew of relatively ‘hawkish’ central bank speak (vs. market expectations), and yesterday’s surprisingly strong U.S. retail sales, but it still feels optimistic to assume such levels of cuts without economic troubles,” Reid added.
