Bond Yields Edge Lower as Traders Adjust Rate Cut Expectations

Market Update

• The yield on the 2-year Treasury BX:TMUBMUSD02Y has dropped 2.1 basis points to 4.383%.
• The yield on the 10-year Treasury BX:TMUBMUSD10Y has eased 1.1 basis points to 4.034%.
• The yield on the 30-year Treasury BX:TMUBMUSD30Y dipped slightly to 4.195%.

Factors Influencing the Market

The benchmark 10-year Treasury yield, which recently fell below 3.8%, has remained above the 4% mark as traders reassess their predictions for Federal Reserve interest rate cuts in 2024.

Previously, there was an 88.5% probability of a 25 basis point rate cut at the March meeting according to market expectations. However, this figure has now decreased to 62.8%. The shift in sentiment follows a stronger-than-expected jobs report and comments from Dallas Fed President Lorie Logan, who stated that it was premature to rule out rate increases given the presence of inflation and the potential impact on demand.

Market projections suggest that the Fed’s target for the Fed funds rate will be around 4.05% by December 2024, compared to the previous hope of reaching 3.85% by the end of this year.

Raphael Bostic, President of the Atlanta Fed, is scheduled to provide further insights at 12 noon Eastern on Monday.

Tenterhooks for December Consumer Prices Index Report

The bond markets will be eagerly waiting for the release of the December consumer prices index report on Thursday. Economists are predicting that the headline annual inflation will stand at 3.3%, which is an increase from the previous month’s figure of 3.1%. However, core inflation, which excludes volatile items such as food and energy, is expected to be 3.8%, down from 4%.

Sparse Economic Data for the Week

Apart from the consumer prices index report, there is not much economic data to look forward to at the start of this week. The New York Fed will release its survey of consumer expectations at 11 a.m. on Monday, followed by the consumer credit data for November at 3 p.m.

Analyst Views on the Current Situation

According to Stephen Innes, the managing partner at SPI Asset Management, finding macroeconomic clarity is still proving to be a challenge. He notes that although there are arguments suggesting that the U.S. labor market has normalized, uncertainties persist in a market that remains uncertain about the possibility of a recession. This uncertainty hints at a potentially volatile year ahead.

Innes also mentions that amidst the ongoing decline in inflation, the Federal Reserve’s rate cut strategy will face a test with the release of both the U.S. consumer prices index (CPI) and producer prices index (PPI) reports this week. He suggests that there is good news as underlying U.S. price pressures are likely to continue to decrease in December, aligning with the Federal Reserve’s positive outlook on inflation.

Stay updated with the latest economic developments and stay prepared for a potentially eventful year ahead.