Benchmark 10-year Treasury yields edged lower on Wednesday for a second straight day as worries about a slowing U.S. economy dented appetite for risk and boosted demand for government bonds.
Thank you for reading this post, don't forget to subscribe!What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.132%
slipped 1.7 basis points to 4.135%, the third-lowest level of the year, according to Dow Jones Market Data. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.441%
retreated less than 1 basis point to 3.461%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.592%
rose less than 1 basis point to 3.622%.
What’s driving markets
A cautious tone across markets encouraged investors to buy government bonds on Wednesday, nudging yields lower.
Investors were focused in early trade on the stock market’s slump after poorly-received forecasts from Microsoft Corp.
MSFT,
hit risk appetite. While declines in U.S. equities were significantly trimmed in afternoon trade, concerns remain about the potential for an economic contraction after the software giant’s “worrisome” warning that demand for its cloud services was slowing.
Many forecasters have been sounding alarms about the risk of the U.S. economy slipping into a recession in 2023, after the Federal Reserve dramatically raised interest rates last year. U.S. central bankers also continue to stress the need to keep rates high for some time to win the inflation fight.
With the next Fed decision on rates due next week, focus remains on Thursday morning’s release of fourth-quarter GDP.
Read: U.S. economy ended 2022 on solid footing, GDP to show. But a recession might loom.
Markets were pricing in a 99.8% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on Feb. 1, according to the CME FedWatch tool. The central bank is expected to take its fed-funds rate target to 4.9% by June 2023, according to 30-day Fed Funds futures.
The Bank of Canada on Wednesday raised its policy rate by 25 basis points, as expected, but traders were surprised by its signaling of a willingness to hit pause on further rate cuts if the economy cooperates. That sparked debate about if the Fed might be willing to follow Canada’s footsteps, and that appeared to help U.S. equities trim earlier losses.
What are analysts saying
“The market is pricing close to 200bp [basis points] of rate cuts in the U.S. between June 2023 and June 2025. Is it too much? Is it too soon?,” asked Francis Yared, fixed income strategist at Deutsche Bank.
“As long as the Fed brings inflation back to target, the answer to the first question is no. In that scenario, the Fed could cut (around) 350bp. The answer to the second question will depend upon the debt-ceiling process. If it results in a significant fiscal tightening, the timing and pace of rate cuts may be accelerated. Otherwise, the cuts could be delayed relative to current market pricing,” Yared wrote.
