The Treasury Yield Dropped to Its Lowest Level in Months Amid Optimism That the Fed Will Cut Rates

Wednesday morning witnessed a further decline in Treasury yields as traders increased their bets on the Federal Reserve initiating interest rate cuts by March.

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Here are the key movements in Treasury yields:

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) decreased by 7.8 basis points to 4.656% from the Tuesday figure of 4.734%.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) retreated by 4.7 basis points, settling at 4.288% compared to 4.335% on Tuesday afternoon.
• The 30-year Treasury yield (BX:TMUBMUSD30Y) dropped by 4.8 basis points to 4.474% from the late Tuesday level of 4.522%.

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According to Dow Jones Market Data at 3 p.m. Eastern time, Tuesday's 2-year Treasury rate was the lowest since July 17, while the 10-year and 30-year yields reached their lowest points since September 18 and September 22, respectively.

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The driving force behind these market movements is the continuation of the substantial declines in yields observed in recent weeks. Traders are anticipating that easing inflation pressures will compel the Federal Reserve to contemplate interest rate cuts in the coming year.

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A significant catalyst for the recent drop in yields can be attributed to comments made on Tuesday by Fed Governor Chris Waller. Waller expressed increasing confidence in the belief that current policy is "well positioned to slow the economy and get inflation back to 2%."

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Market expectations, as reflected in the CME FedWatch Tool, indicate a 98.5% probability that the Fed will maintain interest rates between 5.25%-5.5% on December 13. Furthermore, there is a 96.5% chance of no action by January. Notably, the likelihood of at least a 25-basis-point rate cut by May stands at 77.9%, up from 65.2% the previous day.

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In terms of economic updates, revised data released on Wednesday revealed that the U.S. economy grew at a 5.2% annual pace in the third quarter, surpassing previous reports. However, analysts view this strong gain as a one-off occurrence. The Fed's Beige Book of economic anecdotes is set to be published at 2 p.m. Eastern time.

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Across the Atlantic, German 10-year bund yields (BX:TMBMKDE-10Y) experienced a decline of 5.7 basis points to 2.44%, reaching their lowest point since July. This movement followed data indicating higher-than-expected inflation in Germany for November.

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Reflecting on these developments, Chris Larkin, managing director of trading and investing for E*TRADE from Morgan Stanley, commented, "The numbers over the past several weeks have suggested the economy is slowing. Today’s upward revision to an already strong Q3 GDP reading flies in the face of that cooling trend. While one data point is unlikely to push the Fed to raise rates again, it also won’t push them any closer to declaring victory on inflation and cutting interest rates."

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