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The Treasury Yield Slumps After a Surge Higher Due to Strong Data and Hawkish Fed Statements

February 6, 2024
minute read

On Tuesday morning, Treasury yields experienced a slight decline, retracing from a recent sharp increase driven by robust U.S. economic data that has compelled the Federal Reserve to maintain its current interest rates.

Here's a breakdown of the yield movements:

  • The 2-year Treasury yield slipped 3.7 basis points to 4.433% from Monday's 4.470%.
  • The 10-year Treasury yield fell 2.3 basis points to 4.140% from Monday's 4.163%.
  • The 30-year Treasury yield retreated 2.4 basis points to 4.321% from Monday's 4.345%.

Monday saw the ten- and three-year Treasury yields with their most significant two-day advances since June 2022 and March 2020, respectively. Additionally, the two-year rate experienced its most substantial two-day advance since May of the previous year.

The recent surge in Treasury yields, bringing them close to their highest levels in two months, is a result of stronger-than-expected U.S. economic data reinforcing the Federal Reserve's stance on delaying interest-rate cuts.

The upward movement in yields gained momentum following Friday's official jobs report for January and Monday's data from the Institute for Supply Management and S&P Global. Federal Reserve Chair Jerome Powell over the weekend emphasized the central bank's cautious approach to deciding when to adjust borrowing costs.

While there is no major U.S. economic data scheduled for Tuesday, several Fed officials are set to make appearances. These include Cleveland Fed President Loretta Mester at noon Eastern time, Minneapolis Fed President Neel Kashkari at 1 p.m., Boston Fed President Susan Collins at 2 p.m., and Philadelphia Fed President Patrick Harker around 7 p.m. Additionally, a $54 billion auction of 3-year notes by the Treasury is scheduled for 1 p.m.

Currently, traders are pricing in an 83.5% probability that the Fed will maintain interest rates between 5.25% and 5.5% on March 20, according to the CME FedWatch Tool. The likelihood of a 25-basis-point rate cut by the subsequent May meeting stands at 60.8%. However, the central bank is generally anticipated to reduce its fed-funds rate target to at least between 4% and 4.25% by December.

BMO Capital Markets strategists Ian Lyngen and Vail Hartman noted that overnight developments, including disappointing eurozone retail sales, mixed ECB inflation expectations, and a surge in German factory orders, didn't trigger significant price action. The primary theme appeared to be cross currents as major central banks contemplate the appropriate timing for the cycle's first cut. They highlighted the Bank of Japan as an exception, considering a hike to bring rates out of negative territory.

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Bryan Curtis
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