By Bond yields have experienced a slight dip early on Wednesday as traders closely watch upcoming economic data that could potentially affect the Federal Reserve’s decision at next week’s monetary policy meeting.
What’s Happening
- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) has decreased by 1.6 basis points to 4.322%. Remember, yields move in the opposite direction to prices.
- The yield on the 10-year Treasury (BX:TMUBMUSD10Y) has fallen 2.6 basis points to 4.112%.
- The yield on the 30-year Treasury (BX:TMUBMUSD30Y) has lost 2 basis points, now sitting at 4.347%.
What’s Driving Markets
The 10-year Treasury yield is nearing the 4.1% mark, which has seemingly become its equilibrium level after a tumultuous few months.
Deutsche Bank highlights that benchmark yields experienced their smallest trading range of the year so far on Tuesday. This suggests that investors are growing more optimistic about the economy, inflation, and the overall direction of Federal Reserve policy.
Market predictions suggest a 97.4% likelihood that the Fed will keep its benchmark interest rates unchanged at a range of 5.25% to 5.50% after its meeting on January 31st, according to the CME FedWatch tool.
The probability of a 25 basis point rate cut at the subsequent meeting in March currently stands at 51.3%. This figure has declined from 88% a month ago, primarily due to stronger economic data and less optimism surrounding rate cuts expressed by Fed officials in recent weeks.
The Central Bank’s Interest Rate Outlook
According to 30-day Fed Funds futures, the central bank is expected to bring its Fed funds rate target back down to around 4.06% by December 2024.
Potential Catalysts for Treasuries
On Wednesday, two key reports could have an impact on Treasuries. The S&P flash U.S. services and manufacturing PMI reports for January are due for release at 9:45 a.m. Eastern. Additionally, the Treasury will be auctioning $61 billion of 5-year notes at 1 p.m.
Yield Volatility on the Horizon
Thursday is set to be an eventful day with the release of several important data points. These include the weekly U.S. jobless benefit claims, the reading of fourth quarter 2023 GDP, and December durable goods orders. These releases have the potential to cause yield volatility.
A Key Data Point to Watch
Friday will bring the publication of the December PCE index, which is the Fed’s favored inflation gauge. Analysts consider this to be one of the most significant data points to monitor.
Analyst Insights
Veronica Clark, an economist at Citi, stated, “The fourth quarter GDP report will not provide much new information, but it will showcase a ‘goldilocks’ quarter with both 2% growth and 2% inflation. This will maintain optimism among markets and Fed officials regarding the possibility of a sustained soft landing. However, recent labor market data has shown signs of weakening in the final months of 2023. The key question for early 2024 is whether loosening financial conditions can re-stimulate demand and prevent a near-term recession.”
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