Bonds Fall as Traders Examine Fed Minutes for Clues on Rate Cuts

US Treasuries declined following a selloff in the UK bond market, as traders prepared for a 20-year auction and awaited the release of the Federal Reserve’s latest policy meeting minutes.

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Yields on two-year notes increased by two basis points to 4.86%, while 10-year yields remained relatively stable at 4.41%. This movement was triggered by a 10 basis point surge in 10-year UK gilts after Britain reported stronger-than-expected inflation figures. Despite a report indicating an unexpected drop in US existing home sales, yields remained elevated.

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A cautious atmosphere prevailed ahead of the Fed minutes, scheduled for release on Wednesday afternoon, which are expected to provide insights into the timing of potential monetary policy easing. This week, several central bank officials, including Governor Christopher Waller, emphasized the need for patience regarding rate cuts, insisting that more evidence of cooling inflation is necessary before any easing begins. In conjunction with the minutes, the Treasury Department is set to sell $16 billion of 20-year bonds.

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“The Fed minutes should continue to offer caution on any Fed easing,” said Tom di Galoma, co-head of global rates trading at BTIG. He added that the cheaper bonds would likely encourage strong bidding at the auction.

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Price pressures have been a crucial data point for investors trying to predict the Fed’s next moves. Last week's report showing inflation easing for the first time in six months has made the central bank’s perspective on consumer prices even more critical, as traders try to determine if rate cuts are likely this year. This uncertainty has similarly affected other markets, where traders delayed pricing a first full rate cut to November after the hot consumer price index report on Wednesday.

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“The minutes will likely reinforce the Fed’s view that rates will remain higher for longer, and that the next move will still be a cut, although this will take time,” said Jens Peter Sorensen, chief analyst at Danske Bank in Copenhagen. He noted that the risk is particularly significant in the five-year segment if rate cuts in 2024 are removed from expectations.

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In the US, traders have scaled back their expectations that the Fed will implement two rate cuts this year. Swaps are now pricing in 38 basis points of easing, down from around 42 basis points at the end of last week.

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Overall, the financial markets are closely watching the developments and communications from the Federal Reserve to gauge the future path of monetary policy. The anticipated Fed minutes are expected to provide more clarity on the central bank’s stance, influencing investor sentiment and market dynamics.

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