As traders eagerly await the monetary policy update from the Federal Reserve later today, U.S. bond yields experienced a slight decrease.
- The yield on the 2-year Treasury note (BX:TMUBMUSD02Y) saw a marginal dip of less than 1 basis point, settling at 4.731%. It’s important to note that bond yields move inversely to prices.
- Meanwhile, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) retreated by 1.5 basis points to reach 4.189%.
- Lastly, the yield on the 30-year Treasury note (BX:TMUBMUSD30Y) fell by 2 basis points, landing at 4.292%.
Focus on Federal Reserve
The markets are closely monitoring the policy decision and forecasts that will be released by the Federal Reserve at 2 p.m. Eastern time. Additionally, Chair Jerome Powell will hold a press conference half-an-hour later.
Following a peak at a 16-year high of just over 5% in October, the benchmark 10-year Treasury yield has slumped to around 4.2%. This decline is attributed to optimistic sentiments surrounding inflation, which has been at its lowest level since early 2021. These hopeful expectations suggest that the Fed might halt its borrowing cost hikes.
Market expectations now indicate a 98% probability of the Federal Reserve leaving interest rates unchanged within the range of 5.25% to 5.50% for today’s announcement. Furthermore, investors anticipate a 92% likelihood of rates remaining unchanged during the subsequent meeting in January, according to the CME FedWatch tool.
Since no major policy changes are anticipated, the focus will shift towards whether or not Fed officials, notably Chair Powell, align with the market’s projections of rate cuts as early as May.
Inflation Signals Later in the morning, at 8:30 a.m., the release of November’s producer prices data will be closely analyzed for any indications of growing inflationary pressures.
Oscar Munoz, Chief U.S. Macro Strategist at TD Securities, provided his perspective on Chair Powell’s upcoming challenge. “Powell will have to strike a delicate balance by acknowledging the progress made towards normalizing the economy while pushing back against the notion of early rate cuts. We anticipate the chairman exhibiting cautious hawkishness during the post-meeting press conference,” said Munoz.