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Yields on U.S. government debt were little changed on Wednesday ahead of a $42 billion afternoon auction of 10-year notes and appearances by more Federal Reserve officials.

What’s happening

  • The yield on the 2-year Treasury
    advanced 1 basis point to 4.416% from 4.406% on Tuesday. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    was up 2.6 basis points at 4.117% versus 4.091% on Tuesday.

  • The yield on the 30-year Treasury
    rose 2.5 basis points to 4.321% from 4.296% on Tuesday.

What’s driving markets

Calmer conditions prevailed in bond markets Wednesday morning, with investors coming around to the likelihood that the Fed will not start to cut interest rates until perhaps May.

The shift away from a possible quarter-point rate cut in March follows January’s stronger-than-expected jobs data released last Friday and comments from various Fed officials suggesting that easing policy next month would be too soon, given the need to ensure inflation sustainably heads toward 2%.

Also possibly helping to suppress yields are concerns about fragility in the commercial real-estate sector after New York Community Bancorp’s
debt was downgraded to junk by Moody’s Investors Service late Tuesday.

There is another raft of Federal Reserve officials making appearances on Wednesday. New Fed Gov. Adriana Kugler will speak on policy and the economic outlook at 11 a.m. Eastern time, Boston Fed President Susan Collins will discuss the economy at 11:30 a.m., Richmond Fed President Tom Barkin will speak to the Economic Club of Washington, D.C., at 12:30 p.m., and Fed Governor Michelle Bowman is set to talk at 2 p.m.

In U.S. economic data released on Wednesday, the U.S. trade deficit widened slightly in December, by 0.5% to $62.2 billion. Treasury will auction $42 billion of 10-year notes at 1 p.m.

Ahead of that, markets are pricing in a 79.5% probability that the Fed will leave interest rates unchanged at between 5.25% and 5.5% after its next two-day meeting ends on March 20, according to the CME FedWatch Tool.

The chance of at least a 25-basis-point rate cut by the subsequent meeting in May is seen at 63.9%. The central bank is mostly expected to take its fed-funds rate target back down to between 4% and 4.25% by December.

What strategists are saying

Treasurys “are holding the bulk of Tuesday’s gains as this afternoon’s 10-year refunding remains investors’ near-term focus,” said BMO Capital Strategists Ian Lyngen and Vail Hartman. “It’s been noted that the auction is the largest on record at $42 billion, although we suspect any potential sticker shock will be at least partially offset by the fact the Treasury Department has messaged that auction size increases are done for the time being.”

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