U.S. Treasury bond yields declined moderately, continuing a general downward trend over the past week, driven by the Fed's signals of monetary policy easing in 2024.
The yield on 5-year Treasury bonds fell by 2.8 basis points, reaching 3.922%, while the yield on 30-year bonds was 4.02% (-4.9 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 1.3 basis points to 4.444%, while the yield on 10-year bonds fell to 3.916% (-4.0 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 53 basis points.
The unexpectedly dovish pivot of the Fed last week prompted a steep fall in the 10-year yield as investors increased bets on a faster loosening of monetary policy, despite subsequent statements by Fed policymakers who tried to moderate market optimism about interest rate cuts. Yesterday, the president of the Federal Reserve Bank of Chicago, Ostan Goolsby, said that it was too early to declare victory over inflation, and also noted that he was a little confused by the reaction of the markets to the latest Fed statements. Goolsbee suggested that there seems to be confusion in the markets about how central bank policymakers are working, adding that they are not making prior commitments about what they will do at future meetings. Meanwhile, Cleveland Fed President Loretta Mester noted that markets are slightly ahead of the Fed in their expectations regarding interest rate cuts. She also added that the next stage is not when to cut rates, but how long the Fed will continue to pursue restrictive monetary policy to ensure that inflation returns to 2%. According to the CME FedWatch Tool, markets see a 65.0% probability of a 25 basis point rate cut at the Fed meeting in March 2024 and a 95.0% probability of a rate cut in May 2024.
Today, investors will focus on data on the US housing market. Experts expect that in November, building permits fell to 1.47 million from 1.498 million in October, and the housing starts decreased to 1.36 million from 1.372 million.