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The 10-year U.S. government-debt yield finished lower on Wednesday, after briefly topping the 4% mark in morning trading, as minutes from the Federal Reserve’s December meeting raised uncertainty about the path of monetary policy in 2024.
What’s happening
-
The yield on the 2-year Treasury note
BX:TMUBMUSD02Y
slipped 1.2 basis points to end at 4.316%, from 4.328% on Tuesday, according to Dow Jones Market Data. -
The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
fell 3.9 basis points to 3.905%, snapping three straight sessions of rising yields. -
The yield on the 30-year Treasury note
BX:TMUBMUSD30Y
dropped 2.9 basis points to 4.055%, from 4.084% late Tuesday.
What’s driving markets
Minutes from the Federal Reserve’s Dec. 12-13 policy meeting showed that even though nearly all officials had penciled in an easing monetary policy in their forecasts for 2024, some of them did not rule out further rate hikes depending on how economic conditions evolve.
Meanwhile, “several” officials said that the Fed might have to hold its benchmark rate steady for “longer than they were currently anticipated.” Fed officials stressed that these forecasts were associated with an “unusually elevated degree of uncertainty.”
Also on Wednesday, Richmond Fed President Tom Barkin said that the timing and pace of any changes in interest rates this year will be determined by whether inflation is still coming down and how well the economy is doing.
Despite the cautionary tone from Fed officials, the financial markets still largely expect five to seven quarter-point rate cuts from the central bank this year, compared with just three cuts as policymakers telegraphed last month.
Fed-funds futures traders Wednesday saw a 91.2% chance of the Fed leaving its benchmark rate between 5.25% and 5.5% at its next meeting on Jan. 30-31, according to the CME FedWatch Tool. In addition, the chance of at least a 25-basis-point rate cut by March was at 64.8%, down from 90.3% a week ago.
Meanwhile, U.S. economic data released on Wednesday showed that job openings dipped to 8.8 million in November from a revised 8.9 million in the prior month, while the number of people quitting jobs fell to a 33-month low of 3.47 million. Manufacturing-sector activity contracted in December for a 14th consecutive month, based on ISM’s industry-related PMI reading.
What strategists are saying
The market has begun 2024 by questioning expectations that the Fed will begin cutting interest rates as soon as March. Treasury yields briefly topped the 4% mark on Wednesday morning for the first time since early December. The shift reflects concerns that investors may have misjudged the Fed’s desire to quickly trim rates in response to falling inflation.
Jeffrey J. Roach, chief economist at LPL Financial, said the minutes show that Fed officials realize the “incredible amount of uncertainty” surrounding the macro landscape and want to keep their options open.
The minutes also imply the Federal Open Market Committee will “likely hold rates steady” in March but will start preparing the markets for a cut later in the year should economic growth falter, Roach wrote in emailed comments on Wednesday.
— Jamie Chisholm contributed.
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