Overview
Government bond yields reached their highest levels of the year as U.K. inflation picked up and central bank officials expressed reservations about potential interest rate cuts. This development has led to a spike in yields across various Treasury bonds.
Market Data
- The yield on the 2-year Treasury BX:TMUBMUSD02Y increased by 5.5 basis points to 4.279%.
- The yield on the 10-year Treasury BX:TMUBMUSD10Y slightly decreased by 1 basis point to 4.057%.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y slipped by 2.3 basis points to 4.275%.
Market Factors
Ten-year Treasury yields briefly reached a five-week high of around 4.08% after Federal Reserve governor Christopher Waller indicated that interest rate cuts are likely, but emphasized the importance of a cautious approach to monetary policy adjustments.
Jim Reid, a strategist at Deutsche Bank, noted that Waller’s remarks were intended to counterbalance market expectations, thereby providing a pushback against current pricing trends.
In the United Kingdom, unexpected inflation acceleration to 4% in December added to concerns that central banks may need to maintain high borrowing costs for a longer period of time.
Furthermore, European Central Bank President Christine Lagarde commented that while it is possible for eurozone rates to be cut later this year, she cautioned against markets aggressively pricing in the timing and pace of such monetary easing measures.
After considering all these factors, market participants currently anticipate a 97.4% probability that the Federal Reserve will maintain the current interest rates within a range of 5.25% to 5.50%, according to the CME FedWatch tool.
Chances of Rate Cut Decrease, Fed-Funds Rate Expected to Decrease by December 2024
The likelihood of a 25 basis point cut in the Fed-funds rate by the next meeting in March has decreased to 63%, down from 81% on January 12.
According to 30-day Fed-Funds futures, the central bank is expected to bring its Fed-funds rate target back down to around 3.92% by December 2024.
Upcoming U.S. Economic Data
The upcoming U.S. economic data scheduled for Wednesday includes:
- December retail sales and December import prices at 8:30 a.m. Eastern.
- Industrial production and capacity utilization for December alongside November business inventories at 9:15 a.m.
- Home builder confidence in January will be released at 10 a.m.
- The Fed’s Beige Book, which contains economic anecdotes from businesses, will be published at 2 p.m.
U.S. Treasury Auction
The U.S. Treasury will be auctioning $13 billion of 20-year bonds at 1 p.m.
Analysts’ Perspective
Stephen Innes, the managing partner at SPI Asset Management, stated that despite PCE inflation being on target, the Fed remains cautious about rate cuts until they see sustained progress on inflation. He emphasized that the current inflation metrics suggest that the Fed is more likely to consider tightening in the mid-year rather than making aggressive rate cuts in March. Innes believes that the rates market has overestimated the speed of rate cuts.