U.S. Treasury bond yields have declined moderately, while market participants expect new catalysts that will help clarify the prospects for the economy and the Fed's monetary policy.
The yield on 5-year Treasury bonds fell by 3.4 basis points, reaching 4.254%, while the yield on 30-year bonds was 4.439% (-1.0 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 4.4 basis points to 4.612%, while the yield on 10-year bonds fell to 4.269% (-2.6 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 34 basis points.
The latest US data, which signaled that inflation may turn out to be more stable than investors had hoped, increased the likelihood that the Fed will keep interest rates at current levels for longer before starting to ease monetary policy. Meanwhile, Fed policymakers have also repeatedly warned that before cutting rates, more evidence needs to be seen that inflation is slowing. According to the CME FedWatch Tool, markets see a 36.8% probability of a 25 basis point rate cut at the Fed meeting in May, and a 77.8% probability of a rate cut in June, with approximately 90 basis points of cuts priced in for this year.
This week, investors will be looking to remarks from Fed officials as well as the minutes from the last Fed meeting. As for the data, today at 15:00 GMT, the leading index for January will be published. Although many economists no longer expect a recession in the near future, some time-tested indicators of recession, such as the inverted yield curve and the leading index, still give alarming signals. At the end of 2023, the leading index showed the 22nd consecutive decline and was only three points higher than in April 2020. According to forecasts, the leading index fell by 0.3% in January after a 0.1% decline in December.