US Treasury bond yields are showing negative dynamics, as investors readied for a shorter trading day ahead of the holidays, and also expect the publication of important data that will help clarify the prospects for the Fed's monetary policy.
The yield on 5-year Treasury bonds fell by 2.9 basis points, reaching 3.853%, while the yield on 30-year bonds was 4.004% (-3.1 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 2.2 basis points to 4.327%, while the yield on 10-year bonds fell to 3.861% (-3.3 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 47 basis points.
Today, investors' main attention will be focused on the publication of the core personal consumption expenditure price index (PCE), the Fed's preferred inflation indicator. Economists predict that the growth of the core PCE, which excludes food and energy, slowed to 3.3% per annum from 3.5% per annum in October. Also today, the report on new home sales for November and the Reuters/Michigan consumer sentiment index for December will be released. According to forecasts, new home sales rose to 0.685 million from 0.679 million in October, and the consumer sentiment index increased to 69.4 (the highest value since August) from 61.3 in November. The Reuters/Michigan report will also include statistics on consumer inflation expectations, which may strengthen the chances of a Fed interest rate cut. Preliminary data showed that annual inflation expectations dropped to 3.1% from November's 4.5%, marking the lowest level since March 2021. Expectations for the five-year outlook fell to 2.8%, matching the second lowest reading seen since July 2021. Economists expect the final data to confirm the preliminary estimates. According to the CME FedWatch Tool, markets see a 72.7% probability of a 25 basis point rate cut at the Fed meeting in March 2024 and a 99,7% probability of a rate cut in May 2024.