The yield on US Treasury bonds declined moderately, continuing its downward trend, while market participants continued to digest the results of the Fed meeting and the "dovish" statements by Central Bank Chairman Powell.
The yield on 5-year Treasury bonds fell by 3.9 basis points, reaching 3.891%, while the yield on 30-year bonds was 4.001% (-2.6 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 3.6 basis points to 4.419%, while the yield on 10-year bonds fell to 3.898% (-3.0 basis points), falling below 4% for the first time since early August. 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 52 basis points.
Last week, the Fed left interest rates unchanged, but signaled that three 0.25% rate cuts could be implemented next year. Further rate cuts are also expected during 2025 and 2026, as a result of which the rate will be in the range of 2%-2.25%. According to the CME FedWatch Tool, markets see a 67.5% probability of a 25 basis point rate cut at the Fed meeting in March 2024 and a 96.3% probability of a rate cut in May 2024.
"The latest forecasts of Fed policymakers indicate a big shift from the concept of "high rates for a longer period”. But now the key question is when this rate cut may occur," Deutsche Bank said, adding that expectations for monetary easing were dampened on Friday by New York Fed President John Williams' remarks that "we aren't really talking about rate cuts right now.”
Today, market participants will focus on the publication of the NAHB housing market index for December. Economists expect the index to rise to 36 points from 34 points in November.