U.S. bond yields decline before Federal Reserve meeting


  • The yield on the 2-year Treasury BX:TMUBMUSD02Y has decreased by 2.1 basis points to 4.308%.
  • The yield on the 10-year Treasury BX:TMUBMUSD10Y has fallen by 2.3 basis points to 4.056%.
  • The yield on the 30-year Treasury BX:TMUBMUSD30Y has dipped by 3.1 basis points to 4.286%.

Market Drivers

Treasury yields for the ten-year bonds have slightly dropped close to the 4% mark, following a significant decrease in the previous session. This is due to the news that the U.S. government plans to borrow less than initially projected for the first quarter, which means fewer bonds will need to be sold.

Jim Reid, a strategist at Deutsche Bank, mentioned that market participants are eagerly awaiting the announcement of the Treasury’s coupon auction sizes, which will be released in tomorrow’s refunding statement. He also noted that the previous quarterly refunding announcement in November played a crucial role in the bond rally that occurred in the last part of the year.

In addition to this, the decline in benchmark borrowing costs is happening right before the Federal Reserve’s two-day meeting, where it is widely anticipated that they will maintain their benchmark interest rates within the range of 5.25% to 5.50%.

Fed Rate Cut Possibilities

Investors will eagerly await the Federal Reserve’s latest policy statement and Chair Jerome Powell’s remarks during the press conference. These factors will provide important insights into the likelihood of a rate cut in the coming months.

The probability of the Fed implementing at least a 25 basis point rate cut by their next meeting in March currently stands at 47.6%. This figure represents a significant decrease from 88.5% just a month ago, as recent economic data has exceeded expectations.

According to a team of economists at Bank of America, led by Michael Gapen, recent comments from Fed officials indicate their satisfaction with the overall state of the economy and the progress made in reducing inflation. This positive outlook may pave the way for a policy easing in the future, although no immediate signals will likely be given during Wednesday’s announcement.

Bank of America suggests that the Fed should wait for more data before making any decisions. They believe that the current upward bias in the policy rate guidance is unsustainable and needs to be adjusted. It is expected that the language in the statement will become more neutral, indicating a potential easing bias based on recent changes.

In terms of upcoming economic updates, Tuesday will bring important releases. The S&P Case-Shiller home price index for November will be announced at 9 a.m. Eastern, followed by the December job openings report and January consumer confidence at 10 a.m.

Stay tuned for the latest developments and insights regarding the Fed’s potential rate cut decision.

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