Bond yields nudged fractionally lower early Wednesday as markets come to terms with there being little chance the Federal Reserve will cut interest rates in March.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dipped 1.2 basis points to 4.400%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell less than 1 basis point to 4.095%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
was barely changed at 4.301%.
What’s driving markets
The benchmark 10-year Treasury yield is again hovering around the 4.1% level as calmer conditions prevail in bond markets, with investors appearing — for now at least — reconciled to the prospect of the Federal Reserve not starting to cut interest rates until perhaps May.
Helping to suppress yields perhaps are concerns about fragility in the commercial real estate sector after New York Community Bancorp’s
NYCB,
debt was downgraded to junk by Moody’s, though analysts noted there was little sign of contagion in regional banks for the time being,
The shift away from a possible March rate cut follows some recent stronger-than-expected jobs and service sector data and comments from various Fed officials suggesting an easing of policy next month was too soon given headline consumer price inflation is still 140 basis points above the central bank’s 2% target.
There is another raft of Federal Reserve officials making comments on Wednesday. New Fed Governor Adriana Kugler will speak on policy and the economic outlook at 11 a.m., Boston Fed President Susan Collins will discuss the economic outlook at 11:30 a.m., Richmond Fed President Tom Barkin will speak to the Economic Club of Washington, DC at 12:30 p.m., and Fed Governor Michelle Bowman will talk about supporting small businesses at 2 p.m.
Ahead of that, markets are pricing in a 79.5% probability that the Fed will leave 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.
The chances of at least a 25 basis point rate cut by the subsequent meeting in May is priced at 68.1%. The central bank is expected to take its Fed funds rate target back down to around 4.20% by December 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Wednesday include the trade deficit for December at 8:30 a.m. Eastern, and January consumer credit at 3 p.m.
The Treasury will auction $42 billion of 10-year notes at 1 p.m.
What are analysts saying
“The next major planned events are perhaps the 10-year Treasury auction today and then U.S. CPI revisions on Friday, followed by the January CPI release next Tuesday,” said Jim Reid, strategist at Deutsche Bank.
“Last year, the revisions showed that inflation had fallen less aggressively in the second half of 2022 which influenced rate cut pricing at the time so one to watch,” Reid added.
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