Treasury yields continued to move sharply lower into Tuesday afternoon trading, as fed funds futures traders priced in a high likelihood that the Federal Reserve may not raise interest rates again.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
slipped 12.8 basis points to 4.949% from 5.077% on Friday. It was headed for its lowest closing level since roughly early September. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated 15.6 basis points to 4.627% from 4.783% on Friday, heading for its lowest close of this month. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
fell 11.5 basis points to 4.826% from 4.941% on Friday, leaving it on track for its lowest closing level since at least Oct. 2 - The cash market was shut for the Columbus and Indigenous Peoples holiday on Monday.
What’s driving markets
Treasury trading returned after a U.S. holiday on Monday, with Treasury yields sinking as traders and investors absorbed the outbreak of war between Israel and Hamas, plus comments interpreted as being a dovish from Fed officials.
On Tuesday, Atlanta Fed President Raphael Bostic said he doesn’t think there needs to be anymore rate hikes to get inflation back to 2%. And on Monday, Fed Vice Chair Philip Jefferson said the central bank could “proceed carefully” following the recent jump in Treasury yields to 16-year highs, while Dallas Fed President Lorie Logan said that surge may mean less need for additional rate increases by policy makers.
Tuesday’s retreat in yields will be put to the test in coming days, with data on producer and consumer prices for September to be released on Wednesday and Thursday.
For now, fed funds futures traders are pricing in an 88.4% chance of a pause by the Fed on Nov. 1, according to the CME FedWatch Tool. They also see a 74.1% likelihood of no action by December, which would leave the Fed’s main interest-rate target at a 22-year high between 5.25%-5.5%.
What analysts are saying
“Considerable uncertainty remains over several underlying forces guiding the Treasury market, including the outlook for government bond issuance, the economically neutral level of fed funds rates, and the term premium — the rate of compensation demanded by investors for holding longer-term over shorter-term bonds. But, in our view, the recent upward momentum in yields has been spurred largely by technical factors and should be reversed,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.
