Ten-year Treasury dips below 3.9% as U.K. inflation falls to slowest pace in two years

The U.K. data reinforced debt investors’ hopes that price pressures are still waning in developed economies and that will mean central banks can swiftly cut borrowing costs next year, despite recent protestations to the contrary by several Federal Reserve officials.

The 10-year U.S. Treasury yield slipped back below 3.9%, near its lowest level since July, while equivalent maturity British gilt yields
BX:TMBMKGB-10Y
tumbled 11 basis points to 3.548%, their lowest since April, as investors priced in more rate cuts by the Bank of England in 2024.

German
BX:TMBMKDE-10Y
and Japanese
BX:TMBMKJP-10Y
10-year yields also fell sharply, the latter still powered by the Bank of Japan’s decision this week to maintain its ultra-loose monetary stance.

“The relentless market rally has continued over the last 24 hours, with investors remaining confident that central banks will soon pivot towards rate cuts, despite the pushback from several officials over recent days,” said Henry Allen, strategist at Deutsche Bank.

U.S. economic updates set for release on Wednesday include the current account for the third quarter at 8:30 a.m., followed by November existing home sales and December consumer confidence at 10 a.m. All times Eastern.

The U.S. Treasury will auction $13 billion of 20-year bonds at 1 p.m.

Ahead of that, markets are pricing in an 87.6% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st, according to the CME FedWatch tool.

The chances of at least a 25 basis point rate cut at the subsequent meeting in March is priced at 80.8%, up from 27% a month ago.

What are analysts saying

“Our inflation forecasts point to a rise in inflation the next two months, so we think the market expectations for a rate cut in March are overdone,” said analysts at Morgan Stanley led by chief U.S. economist Ellen Zentner.

“In particular, to get a rate cut in March, we think we would need to see less than 50k for Feb nonfarm payrolls AND core CPI below 0.2% month on month.”

“We think it will take until June for the Fed to have clear and convincing evidence inflation will return to the 2% target, and therefore begin cutting rates,” the team at Morgan Stanley added.