Treasury Yields Dip Ahead of the Fed's Two-day Policy Meeting

On Tuesday morning, U.S. government-debt yields experienced a modest uptick following the release of data indicating a surge in consumer confidence to its highest level in just over two years.

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The 2-year Treasury yield saw a 2.5 basis point increase to 4.345% from Monday's 4.320%, while the 10-year Treasury yield advanced less than 1 basis point to 4.092% from 4.089%. Conversely, the 30-year Treasury yield dipped 2.3 basis points to 4.31% from Monday's 4.333%. This movement is in line with the inverse relationship between yields and prices.

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The catalyst for this shift in the bond market was the positive data on consumer confidence in January, which surged to 114.8, marking its highest level since December 2021. The improved sentiment appeared to be influenced by a combination of factors, including a moderation in inflation, expectations of lower interest rates, and favorable employment conditions.

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Accompanying this, additional economic data revealed that job openings remained relatively steady at 9 million in December, and the S&P CoreLogic Case-Shiller 20-city home price index showed a marginal 0.1% increase in November.

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Investors are closely monitoring the two-day monetary policy meeting of the Federal Reserve, which commenced on Tuesday. The prevailing expectation is for the central bank to maintain its benchmark interest-rate policy target between 5.25% and 5.5% this week. Attention is particularly focused on the policy statement scheduled for Wednesday and insights from Chair Jerome Powell's press conference for indications regarding the likelihood of a rate cut in the upcoming months. The probability of a 25-basis-point rate cut by March is currently at 39%, a notable decline from 73.4% reported a month ago.

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Analysts anticipate a cautious approach from the Fed, with BofA Global Research economist Michael Gapen, along with strategists Mark Cabana and Alex Cohen, stating their expectation of the first rate cut in March.

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However, they anticipate no strong signal in January, emphasizing the need for the Fed to gather more data before making decisive moves. The analysts believe that the current upside hiking bias in the Fed's statement is unsustainable and predict a shift towards a more neutral language. While the overall direction of recent changes signals a potential easing bias, the analysts underscore the importance of closely monitoring the evolving economic landscape.

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