By Bond yields saw a slight increase on Tuesday, with trading remaining relatively stable due to a lack of significant market-moving events.
Notable Changes in Yields
- The 2-year Treasury yield (BX:TMUBMUSD02Y) rose by 3 basis points to 4.411%. Remember, yields and prices move in opposite directions.
- The 10-year Treasury yield (BX:TMUBMUSD10Y) increased by 2.6 basis points to 4.132%.
- The 30-year Treasury yield (BX:TMUBMUSD30Y) climbed by 2.9 basis points to 4.351%.
Market Drivers
The recent stabilization of the benchmark 10-year Treasury yield at around 4.1% suggests that traders are awaiting news that could potentially challenge the current consensus on the economy’s trajectory and Federal Reserve policy.
So far this week, there has been a lack of influential economic data. The only significant release today is the Richmond Fed index for January, scheduled for 10 a.m. Eastern.
Jim Reid, a strategist at Deutsche Bank, noted that the absence of any clear catalysts contributed to the limited movement in yields. Additionally, there will be no comments from Fed officials until after next week’s decision.
According to the CME FedWatch tool, markets are assigning a 97.4% chance that the Fed will maintain interest rates within the range of 5.25% to 5.50% after its meeting on January 31st.
Changes in Market Expectations for Rate Cut
Market expectations for a 25 basis point rate cut during the upcoming meeting in March have significantly decreased from 88% to 43.5% in just one month. It is anticipated that the central bank will lower its Fed funds rate target to approximately 4.11% by December 2024, as indicated by the 30-day Fed Funds futures.
Treasury Auction of 2-Year Notes
At 1 p.m., the U.S. Treasury will be conducting an auction of $60 billion worth of 2-year notes.
Bank of Japan Maintains Policy, Hints at Possible Tightening
The Bank of Japan has decided to keep its policy unchanged for now. This includes maintaining its short-term rate at minus 0.1% and keeping its yield curve control parameters intact. Initially, Japan’s government bond yields (BX:TMBMKJP-10Y) experienced a rise after Governor Kazuo Ueda made comments that suggested a potential tightening of monetary policy in the near future.
Analyst Predictions and Insights
Impactful Data on the Horizon
Alex Pelle, a U.S. economist at Mizuho, highlights that the upcoming week will bring significant data releases that could heavily influence the bond markets. In particular, the fourth quarter U.S. GDP report, scheduled for publication on Thursday, is expected to play a crucial role.
Stabilizing Nominal GDP Growth
Pelle expects the upcoming GDP report to reinforce the notion that nominal GDP growth is stabilizing at a pace noticeably higher than what the U.S. economy achieved during the 2010s. However, he also notes that this stability could be delicate and potentially insufficient to sustain disinflation.
Labor Market Retightening
Pelle expresses interest in monitoring the initial claims data on Thursday. There are indications suggesting a re-tightening of the labor market, as evident from claims and other layoff data. Such a development aligns with the significant easing of financial conditions over the past 2.5 months, making it an important aspect to watch closely.
Fed’s Preferred Inflation Gauge
On Friday, the PCE inflation gauge will be released, which is the Federal Reserve’s preferred measure of price pressures. Its findings will provide valuable insight into the level of inflationary pressures in the economy.
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