Treasury Yields Move Lower as Traders Bolster Bets ECB Will Join the Fed in Cutting Rates in 2024.

On Tuesday, Treasury yields experienced a decline as investors continued to factor in anticipated interest rate cuts by major central banks in the coming year.

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Breaking down the numbers, the yield on the 2-year Treasury (BX:TMUBMUSD02Y) dropped by 4.4 basis points to 4.612% from the previous day's 4.656%. Simultaneously, the yield on the 10-year Treasury (BX:TMUBMUSD10Y) retreated by 9.9 basis points to 4.187% from 4.286% on Monday. Additionally, the yield on the 30-year Treasury (BX:TMUBMUSD30Y) saw a decrease of 10.2 basis points to 4.335% from 4.437%.

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The driving force behind these movements in the bond market was the ongoing expectation among investors that major central banks, both in the U.S. and Europe, are poised to implement interest rate cuts in 2024.

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In Europe, specifically, ten-year German bund yields (BX:TMBMKDE-10Y), the regional benchmark, fell by 9.1 basis points to 2.268%. This shift came after Isabel Schnabel, a board member of the European Central Bank (ECB), who is typically associated with a hawkish stance, refrained from ruling out the possibility of interest rate cuts in the upcoming year.

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Traders, as of early Tuesday, were pricing in a significant 150 basis points of cuts by the European Central Bank in the next year, a substantial increase from the mere 75 basis points considered just a few weeks prior, according to Bloomberg data. Currently, the ECB's primary deposit rate stands at a record high of 4%, and inflation, which peaked above 10% last year, has receded to 2.4%, slightly above the central bank's 2% target.

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This shift in the ECB's stance aligns with expectations of a similar pivot from its U.S. counterpart. Market indicators suggest a nearly 100% likelihood that the Federal Reserve will maintain interest rates between 5.25% and 5.5% during its meeting on December 13. The probability of no action by January is estimated at 85.5%, according to the CME FedWatch Tool. Furthermore, there is a 62.3% chance of at least a 25-basis-point rate cut by the subsequent meeting in March, a notable increase from the 25.5% probability recorded a month ago.

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Investors are closely eyeing a series of U.S. jobs data scheduled for release this week, hoping that it will provide support for the expectation of a more accommodative policy in the coming months. The latest data on Tuesday revealed a drop in job openings to a 28-month low of 8.7 million in October, signaling a further cooling of the labor market. This report is complemented by upcoming releases such as the ADP survey of private-sector hiring, weekly unemployment claims data, and the November nonfarm payrolls report on Friday.

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In addition to labor market data, Tuesday's U.S. economic updates included S&P Global's final services purchasing managers index for November, which increased to 50.8% from 50.6% in the prior month. Furthermore, an ISM survey indicated that the services sector expanded for the 11th consecutive month in October.