Sun. Jul 21st, 2024

Yields fell on Tuesday and benchmark 10-year note yields reached three-month lows as investors priced for the possibility that the economy will weaken at a faster rate and lead the Federal Reserve to cut interest rates as soon as March.

Weakening data and dovish comments from some Fed officials have sent yields tumbling, with 10-year yields dropping from 16-year highs reached in October.

Yields extended their drop on Tuesday after a report showed that job openings fell sharply in October.

U.S. data this week will be closely watched for new clues on the strength of the economy, with Friday’s jobs report for November the main focus. It is expected to show that employers added 185,000 jobs during the month.

“The market is comfortable with the idea that the economy is slowing, consumption’s facing headwinds, but they don’t know how much it’s going to slow,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

“That’s why people are willing to price in a bit of a wild card potential for a Q1 rate cut – because the slowing might be more than expected,” Lyngen added.

Fed funds futures traders are pricing in a more than 50% probability that the Fed will begin cutting rates in March, and see 128 basis points in rate reductions by December 2024.Benchmark 10-year yields fell to 4.163%, the lowest since Sept. 1. The have tumbled from a 16-year high of 5.021% on Oct. 23.

Thirty-year yields fell to 4.321%, the lowest since Sept. 14. Five-year yields reached 4.123%, the lowest since August 10.

Two-year yields got to 4.560% and are holding above the 4.540% level reached on Friday, which was the lowest since June 13.

Yields tumbled last week after Fed governor Christopher Waller said that he is “increasingly confident” the current setting of the central bank’s benchmark interest rate will prove adequate to lower inflation to the Fed’s 2% target and nodded to possible rate cuts in a matter of months.

However, “Powell and other Fed speakers attempted to walk that back,” said Lyngen.

Fed Chairman Jerome Powell said on Friday that the risks of the Fed slowing the economy more than necessary have become “more balanced” with those of not moving interest rates high enough to control inflation, but also reiterated that it was still too early to declare the Fed’s inflation fight finished.

Fed officials are now in a blackout period ahead of the U.S. central bank’s Dec. 12-13 meeting, where a key focus will be the updated projections of where Fed officials see rates at in 2024.

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