Bond Yields Decline

Bond Yields Decline Following Return of U.S. Investors After Long Weekend

Market Movement

• The yield on the 2-year Treasury BX:TMUBMUSD02Y dropped 1.7 basis points to 4.623%.
• The 10-year Treasury BX:TMUBMUSD10Y saw a decrease of 1.1 basis points, landing at 4.273%.
• In contrast, the 30-year Treasury BX:TMUBMUSD30Y remained relatively steady at 4.441%.
• Due to the President’s Day holiday, the Treasury market was closed on Monday.

Market Trends

Bond yields experienced a slight decline as futures of equity indices fell, prompting investors to seek refuge in assets like Treasurys and gold GC00, which climbed above $2,020 per ounce.

Events in China also influenced market sentiment as concerns about the country’s economic well-being surfaced following Beijing’s significant reduction in a five-year mortgage rate to support its struggling property market. On the other hand, a decrease in industrial activity in China contributed to a deflationary trend, leading to a 5% drop in iron ore futures trading in Singapore below $125 per ton.

Looking forward, traders are anticipating the release of minutes from the Federal Reserve’s January 31 policy meeting on Wednesday. It is anticipated that the discussions will echo recent public statements from Federal Reserve officials, emphasizing the need for further evidence of inflation slowdown before considering any adjustments to official borrowing rates. Market Predictions

Currently, markets are pricing in a 91.5% probability that the Fed will keep interest rates constant within a range of 5.25% to 5.50% after their upcoming meeting on March 20th. The CME FedWatch tool provides this insight into market sentiment.

Rate Cut Expectations

The likelihood of a 25 basis point rate cut by the following meeting in May stands at 36.5%, a significant drop from the 84% figure recorded a month ago. Projections indicate that the central bank may adjust its Fed funds rate target to approximately 4.5% by December 2024, as indicated by 30-day Fed Funds futures.

Key Economic Updates

On Tuesday, U.S. economic updates are anticipated, including the release of leading economic indicators for January, scheduled for 10 a.m. Eastern Time.

Analyst Insights

According to strategists at Danske Bank, the recent positive surprises in macro data, particularly last week’s CPI figures, have led to a revision in their Fed forecast. They now anticipate the first 25 basis point rate cut in May, having previously predicted it for March.

Maintaining their belief in robust structural growth and ongoing disinflation, Danske Bank foresees quarterly reductions by the Fed thereafter. Their revised outlook suggests three cuts in 2024, set for May, July, and November, compared to their previous estimation of four cuts.