U.S. Treasury bond yields have mostly risen, while market participants are awaiting statements from Fed policymakers that may provide clues about the monetary policy prospects.
The yield on 5-year Treasury bonds rose by 0.5 basis points, reaching 4.049%, while the yield on 30-year bonds was 4.308% (+1.2 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 0.3 basis points to 4.405%, while the yield on 10-year bonds increased to 4.108% (+1.6 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 30 basis points.
Experts said that recent hawkish statements by Fed Chairman Jerome Powell have increased uncertainty about the monetary policy prospects and forced investors to reconsider their expectations regarding the timing of interest rate cuts. According to the CME FedWatch Tool, markets see a 21.5% probability of a 25 basis point rate cut at the Fed meeting in March and a 67.1% probability of a rate cut in May, with 115 basis points of cuts priced in for this year (compared to 150 basis points in early January). Overall, recent events have increased concerns about the impact of higher rates on the economy and whether they could lead to a recession in the United States.
Further Fed officials are due to make remarks today. In addition, December data on the US trade balance will be published today. In November, the trade deficit narrowed slightly, which was caused by a more significant drop in imports than exports. International trade flows were generally weak in November, especially due to the goods sector. Imports and exports of goods decreased by 2.3% and 3.2% respectively over the month. Imports and exports of consumer goods were particularly weak. As for December, preliminary data showed that the balance of foreign trade in goods decreased by $0.9 billion in December. Exports of goods jumped 2.5% ($4.1 billion) over the month to $169.8 billion (seasonally adjusted), driven by a significant increase in exports of manufactured goods, which partially offset the decline in this category last month. Imports of goods increased by a more moderate 1.3% ($3.2 billion) to $258.3 billion, which was due, in particular, to an increase in imports of consumer goods. According to forecasts, the trade deficit fell to $62.2 billion from $63.2 billion in November.