On Tuesday, longer-term Treasury yields continued to fall, extending a retreat from their 16-year highs above 5%. Several key factors are driving this market movement.
Treasury Yields Update
- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) rose by 2.2 basis points to 5.080%.
- The yield on the 10-year Treasury (BX:TMUBMUSD10Y) retreated 1.1 basis points to 4.838%.
- The yield on the 30-year Treasury (BX:TMUBMUSD30Y) fell 3.3 basis points to 4.970%.
Key Drivers behind the Market Movement
The retreat in benchmark yields was initially triggered by a rush of buying once the 10-year Treasury offered a yield above 5%. This trend was further exacerbated by bullish comments on bonds made by hedge fund manager Bill Ackman and former Pimco boss Bill Gross. These factors have been influential in the market’s continued decline during early trading on Tuesday.
Over the past 24 hours, the 10-year yield has shed nearly 20 basis points since reaching its 16-year high of 5.02%. Both Bills have indicated that interest rates may likely fall due to concerns about the overall health of the U.S. economy. Recent headline data has suggested that the economy may not be as strong as initially perceived.
As a result, there has been a slight shift in the expected trajectory of Federal Reserve policy. Market expectations are pricing in a 98.5% probability that the Fed will maintain interest rates at their current range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.
Potential Rate Hike and Market Outlook
The possibility of a 25 basis point rate increase for the upcoming meeting in December has dropped to 24% from 38.5% just a week ago. This shift suggests that the market is reassessing the likelihood of a rate hike.
Furthermore, according to 30-day Fed Funds futures, it is now anticipated that the central bank will aim to bring its Fed funds rate target down to approximately 5% by August 2024. Previously, analysts did not expect this level to be reached until October.
Key Economic Updates and Auction
On Tuesday, significant economic updates are scheduled for release, including the S&P flash services and manufacturing PMIs for October, which will be available at 9:45 a.m. Eastern time. These indicators provide valuable insights into the performance of these sectors.
Moreover, the Treasury plans to hold an auction of $51 billion worth of 2-year notes at 1 p.m., providing an opportunity for investors to invest in these securities.
Analysts from Deutsche Bank, led by Amy Yang, have interpreted recent communications from the Federal Reserve in regard to monetary policy. They believe that policymakers, regardless of their stance on rate hikes, are emphasizing the importance of considering the impact of rising long-term yields on financial conditions. Consequently, the consensus is that the Fed is likely to keep rates unchanged at the upcoming meeting.
Additionally, the minutes from the September meeting revealed a shared belief among officials that rates should remain elevated “for some time,” underscoring the importance of maintaining stability in interest rates.