Bond yields fell on Tuesday as a mild risk-off tone enveloped markets after U.S. investors returned from a long weekend.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell 1.7 basis points to 4.623%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
dipped 1.1 basis points to 4.273%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
was barely changed at 4.441%. - The Treasury market was shut on Monday for the President’s Day holiday.
What’s driving markets
Bond yields nudged lower as falls for equity index futures encouraged buying of perceived haven assets such as Treasurys and gold
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which rose back above $2,020 an ounce.
Concerns about the health of China’s economy came into focus after Beijing trimmed a five-year mortgage rate by a record amount in an attempt to support the ailing property sector.
But worries about declining industrial activity in China pushed iron ore futures trading in Singapore down 5% to a three-month trough below $125 a ton — highlighting a deflationary trend that provides additional support to global bond prices.
Traders were also looking ahead to the release on Wednesday of the minutes for the Federal Reserve’s January 31 policy meeting. It is expected the discussion will confirm what many Fed officials have been saying publicly of late: that they want to see more evidence that inflation is cooling before considering trimming official borrowing costs.
See also: Powell needs to avoid a ‘Honey, I forgot to shrink the policy rate’ moment
Markets currently are pricing in a 91.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut by the subsequent meeting in May is priced at 36.5%, down from 84% a month ago. The central bank is expected to take its Fed funds rate target back down to around 4.5% by December 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Tuesday include the leading economic indicators for January, due at 10 a.m. Eastern.
What are analysts saying
“After the recent upside surprises in macro data, not least last week’s CPI, we revise our Fed call and now look for the first 25 basis point rate cut in May (from March previously),” said strategists at Danske Bank in a note published Tuesday.
“Our longer-term view of solid structural growth and continuing disinflation still holds, and we think the Fed will opt for gradual quarterly reductions afterwards. In total, we see three cuts in 2024, in May, July and November (previously four),” Danske Bank added.
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