10-year Treasury note rallies hard, sending yield down toward 4% on growing confidence in Fed’s inflation fight

Increasing confidence in the Federal Reserve’s ability to bring inflation to a heel breathed new life into the recent rally in Treasurys, sending the widely followed 10-year yield down to a level not seen in four months on Wednesday.

The benchmark 10-year rate
BX:TMUBMUSD10Y
finished the New York session at 4.032%, falling 17.3 basis points to its lowest closing level since Aug. 9, after policymakers signaled a readiness to deliver three quarter-point rate cuts next year. The long-dated yield, used as a benchmark for borrowing costs on everything from mortgages to student debt and auto loans, is now down almost a full percentage point since late October, when it briefly surpassed 5% for the first time in 16 years.

Read: Fed will try to ‘Keep calm and carry on’ amidst talk of steep rate cuts and recession

A broad-based rally took hold across the $26 trillion market for U.S. government debt on Wednesday — extending the buying trend seen through November, while giving investors and traders a welcome break from the painful selloffs of the past two years as the Fed relied on rate hikes to combat inflation.

“One of the biggest things about what we’ve seen since mid-October through today is that the 10-year note has rallied significantly, and that’s a really big deal given the fact that we’ve seen fixed-income markets endure a relatively painful past two years as yields have risen,” said Chip Hughey, the Richmond, Va.-based managing director of fixed income at Truist Advisory Services.

“We are recovering from what seemed like a relentless rise in yields over the last couple of years that had largely been about inflation running far too hot and the Fed having to aggressively respond to it,” Hughey said on a phone call Wednesday. “Over the course of the past few months, inflation appears to be cooperating and cooling at a fairly rapid pace — allowing the Fed to make a notable shift in its rate outlook.”

Yields plummeted across the board on Wednesday, led by the policy-sensitive 2-year rate
BX:TMUBMUSD02Y
which finished down by 25.2 basis points at around 4.48%. Meanwhile, the Dow Jones Industrial Average
DJIA
scored its highest close in its history, jumping 512.30 points to end at 37,090.24.

Until Wednesday, “it was hard to know where the Fed’s end game would be, and there is some relief now that the Fed is signaling that its rate-hike campaign has come to end,” Hughey said.