Treasury yields end at 3-month lows as traders factor in ECB, Fed rate cuts in 2024

Ten-year German bund yields
BX:TMBMKDE-10Y,
the European benchmark, fell 10.9 basis points to 2.250% after Isabel Schnabel, a European Central Bank board member known for her usually hawkish stance, declined to rule out interest-rate cuts next year.

The ECB’s main deposit rate is currently at a record high of 4% and inflation, which hit a peak above 10% last year, is now down to 2.4% or just above the central bank’s 2% target. Early Tuesday, traders priced in 150 basis points of cuts by the ECB next year, up from 75 basis points a few weeks ago, according to Bloomberg data.

The shift in ECB thinking fits alongside expectations for a pivot from its U.S. peer. Markets saw a 99.9% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Dec. 13, and an 85.5% chance of no action by January, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by the subsequent meeting in March was seen at 64.1%, up from 25.5% a month ago.

Meanwhile, the U.S. bond market appeared to be signaling that a swift U.S. economic slowdown isn’t entirely off the table.

Data released on Tuesday showed that job openings dropped to a 28-month low of 8.7 million in October, a sign of further cooling of the labor market. The JOLTS report will be followed on Wednesday by the ADP survey of private-sector hiring, weekly initial jobless claims data on Thursday, and the November nonfarm payrolls report on Friday.

In other U.S. economic data on Tuesday, S&P Global’s final services purchasing managers index for November came in at 50.8%, up from 50.6% in the prior month. And the services sector expanded for an 11th straight month, according to an ISM survey.

What analysts are saying

“A market that was obsessively focused on the path of the 10-year Treasury yield, and rightly so as it quickly breached 5% on Oct. 19, has also embraced the faster than expected drop lower for yields,” said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, N.C.

“However, the quickening pace of yields is concerning as it reflects a slowing economic backdrop, but perhaps one that is deteriorating at a faster than desired clip. The characterization of the economy symbolizing the Fed’s success at engineering a soft-landing has to be questioned in light of the most recent Q4 economic forecasts, with prospects now edging rapidly below 2%.”

See: Stellar stock-market rally builds on ‘soft landing’ hopes. Why the economy isn’t out of the woods.