U.S. Treasury bond yields rose moderately, while investors remain focused on the Fed's monetary policy prospects.
The yield on 5-year Treasury bonds increased by 2.6 basis points, reaching 3.873%, while the yield on 30-year bonds was 4.038% (+4.9 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, rose by 2.0 basis points to 4.301%, while the yield on 10-year bonds increased to 3.887% (+3.7 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 41 basis points.
After the Fed turned dovish at its December meeting, investors are asking questions about when and how often the central bank will cut interest rates. According to the CME FedWatch Tool, markets see a 70.1% probability of a 25 basis point rate cut at the Fed meeting in March 2024 and a 100% probability of a rate cut in May 2024, with over 150 basis points of cuts priced in for next year. In addition, uncertainty remains about the state of the US economy and whether the Fed will achieve a soft landing and avoid a recession. The Congressional Budget Office predicts that GDP growth will slow to 1.5% in 2024 from 2.5% in 2023. As for 2025, the CBO expects the economy to expand by 2.2%. Meanwhile, the IMF predicts that U.S. GDP will grow by 2.1% in 2023 and 1.5% next year.
U.S. bond markets will close early on Friday and remain closed on Monday in celebration of the new year.