Bond Yields Dip as Rate-Cut Expectations Ease

Yield Movement

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) decreased by 2.9 basis points to 4.445%.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) fell 2.2 basis points to 4.140%.
• The yield on the 30-year Treasury (BX:TMUBMUSD30Y) retreated by less than 1 basis point to 4.333%.

Market Drivers

Ten-year Treasury yields, which serve as the global rate benchmark, are currently near the higher end of a two-month range. This surge follows unexpectedly positive U.S. economic data that reinforced the Federal Reserve's stance against immediate interest rate cuts.

The recent increase in bond yields can be attributed to multiple events. Firstly, Friday's robust jobs report gave momentum to the rise, followed by Monday's ISM services update, which indicated a significant increase in the prices paid component. Furthermore, Fed Chair Jerome Powell stated on Sunday that it was unlikely for the central bank to reduce borrowing costs after its upcoming March meeting. Consequently, these factors have contributed to a considerable sell-off in bond prices.

Jim Reid, a strategist at Deutsche Bank, emphasized, "Since the jobs report on Friday, the 10-year Treasury yield has risen by 27.8 basis points. This marks the most substantial two-day surge since June 2022 when the Fed last unexpectedly increased rates by 75 basis points, breaking their trend of no hikes since the 1990s. Therefore, it is essential not to overlook the significance of these movements and the accompanying volatility."

Economic Data and Fed Officials' Comments

Tuesday's Economic Outlook

There are no top drawer economic data scheduled for Tuesday. However, multiple Federal Reserve officials will be making significant comments throughout the day. This includes Cleveland Fed President Loretta Mester at noon Eastern, Minneapolis Fed President Neel Kashkari at 1 p.m., Boston Fed President Susan Collins at 2 p.m., and Philadelphia Fed President Patrick Harker at 7 p.m.

Market Expectations for Interest Rates

Market expectations suggest an 83.5% probability that the Fed will maintain interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool. Interestingly, just a month ago, the likelihood of at least a 25 basis point cut was priced at 68.1%.

Furthermore, the probability of a 25 basis point rate cut by the subsequent meeting in May is currently priced at 61.9%.

Future Interest Rate Predictions

According to the 30-day Fed Funds futures, the central bank is expected to bring its Fed funds rate target back down to approximately 4.25% by December 2024.

Treasury Auction

At 1 p.m., the Treasury will hold an auction for $54 billion worth of 3-year notes.

Economic Analysis by Goldman Sachs

Jan Hatzius, an economist at Goldman Sachs, stated in a note published on Monday, "Could the recent outsize strength of the U.S. economy — visible in the 4.1% GDP growth pace in 2023H2 and the 353k January nonfarm payroll gain — derail continued progress on disinflation? We don’t think so."

Hatzius continued, "A broader set of indicators suggest that output is at most growing modestly above trend, the labor market is back in balance, and wage growth continues to trend down toward a sustainable rate. Combined with our expectation that year-over-year core PCE inflation will fall to 2.2% in Q2, we continue to expect five Fed cuts this year, most likely beginning in May."