U.S. Treasury bond yields have mostly declined, while market participants assess the prospects for monetary policy easing and how this could impact the U.S. economy and financial markets.
The yield on 5-year Treasury bonds fell by 3.0 basis points, reaching 3.872%, while the yield on 30-year bonds was 4.02% (-2.3 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, rose by 0.4 basis points to 4.293%, while the yield on 10-year bonds fell to 3.872% (-1.4 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 42 basis points.
After the end of its December meeting, the Fed signaled that interest rates would be cut three times next year, with further cuts expected in 2025 and 2026. Meanwhile, the latest data showing cooling inflation has emboldened bets of easing next year. The Commerce Department said that the core personal consumption expenditure price index - the Fed's preferred measure of core inflation - increased by 0.1% over the month and by 3.2% per annum. Economists had expected growth of 0.1% and 3.3%, respectively. According to the CME FedWatch Tool, markets expect rates to remain unchanged at the January Fed meeting, but see a 71.3% probability of a 25 basis point rate cut at the meeting in March 2024 and a 99.7% probability of a rate cut in May 2024, with over 150 basis points of cuts priced in for next year.