What’s Happening

  • The yield on the 2-year Treasury (BX:TMUBMUSD02Y) dropped 2.6 basis points to 4.442%.
  • The yield on the 10-year Treasury (BX:TMUBMUSD10Y) decreased by 2.8 basis points to 3.911%.
  • The yield on the 30-year Treasury (BX:TMUBMUSD30Y) dipped 3 basis points to 4.018%.

What’s Driving Markets

The 10-year Treasury yield reached its lowest level since July as traders analyzed various factors influencing the bond market.

One element contributing to falling yields is the belief that recent low U.S. inflation may enable the Federal Reserve to reduce interest rates next year. However, Federal Reserve officials have tried to temper market enthusiasm for this scenario.

Another factor putting downward pressure on yields is the Bank of Japan’s decision to maintain their interest rates at minus 0.1%. Governor Kazuo Ueda’s lack of indication regarding a future departure from their ultra-loose stance during his press conference further contributed to decreasing yields.

As a result, Japanese government bond yields (BX:TMBMKJP-10Y) dropped, making U.S. bonds comparatively more appealing.

Potential Inflationary Pressures in Global Bond Yields

Global bond yields have witnessed a downward trend recently; however, concerns have emerged regarding potential inflationary pressures in the Middle East. Maritime transport groups have suspended transits through the Red Sea due to attacks on boats by Yemen’s Houthi militia. This disruption in shipping has raised concerns about rising shipping costs. Additionally, worries about oil supplies from the region are likely to lead to an increase in energy prices.

Fed Rate Cut Expectations

Despite these concerns, the expectations for rate cuts by the Federal Reserve in the coming months have only seen a slight reduction. Currently, market indicators suggest a 92% probability that the Fed will hold interest rates steady within a range of 5.25% to 5.50% after its meeting on January 31st. However, the chances of a 25 basis point rate cut at the subsequent meeting in March have risen to 72.5%, up from just 28% a month ago.

U.S. Economic Updates and Fed’s Outlook

On Tuesday, there will be updates on November housing starts and building permits scheduled for release at 8:30 a.m. Eastern time. Additionally, Atlanta Fed President Raphael Bostic is expected to deliver a speech at 12:30 p.m.

Chief economist at Stifel, Lindsey Piegza, acknowledges the Fed’s optimism that inflation will recede in a well-ordered and timely manner. However, she also highlights the unpredictability of price pressures, which have shown fluctuations in the past. With that in mind, Piegza believes that while the possibility of rate cuts is being considered, some are advocating for a cautious approach focused on achieving the Fed’s goal of 2% inflation before making any decisions to modify policy restrictions.

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