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Treasury Yields Dip Ahead of Powell's Press Conference and the Fed Rate Decision

January 31, 2024
minute read

Wednesday saw a significant decline in U.S. government-debt yields as traders scrutinized fresh U.S. data and positioned themselves ahead of the Federal Reserve's monetary policy decision, statement, and press conference later in the session.

Here's a breakdown of the key changes in yields:

  • The 2-year Treasury yield fell 13.2 basis points to 4.225% from Tuesday's 4.357%.
  • The 10-year Treasury yield dropped 10 basis points to 3.956% from 4.056% on the previous day.
  • The 30-year Treasury yield declined 7.3 basis points to 4.204% from Tuesday's 4.277%.

The day's developments began with overseas data indicating that China's manufacturing activity contracted for the fourth consecutive month in January, initiating a round of Treasury buying. This momentum gained further strength after the release of U.S. data. The ADP private-sector employment report revealed that American businesses created a lower-than-expected 107,000 new jobs in January. Additionally, the cost for companies to employ workers increased by 0.9% in the fourth quarter, marking the smallest rise in 2½ years.

Investors also grappled with a batch of poorly-received earnings reports from late Tuesday while looking ahead to the U.S. Federal Reserve's policy statement at 2 p.m. Eastern time and Chairman Jerome Powell's subsequent press conference for insights into potential interest rate cuts.

Fed fund futures traders, according to the CME FedWatch Tool, priced in a 97.9% probability that the Fed would maintain its benchmark interest-rate target between 5.25% and 5.5%. The likelihood of a 25-basis-point rate cut by March stood at 56.2%, with a 42.6% chance of no change by that month.

Separately, the Treasury announced plans to sell $121 billion in notes and bonds in the coming week.

Analysts weighed in on the situation, with Deutsche Bank strategist Jim Reid stating, "When it comes to the Fed, it's widely expected they'll leave rates unchanged today, so the big question instead is what they signal about the timing and speed of rate cuts moving forward."

The Deutsche Bank team expects the Federal Open Market Committee (FOMC) to abandon its tightening bias, anticipating the removal of the reference to 'the extent of additional policy firming' in the post-meeting statement. Looking ahead to the March meeting, they predict Powell will keep the door open for a potential rate cut but will not express urgency, maintaining flexibility in the timing of any move.

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Bryan Curtis
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