Ten-year Treasury yields hover near five-month lows as traders parse Fedspeak

Bond bulls were energized by Fed officials predicting a likely 75 basis points of rate cuts in 2024 and more dovish comments from Chair Jerome Powell.

However, the optimism has been cooled somewhat in recent days after Fed officials — including New York Federal Reserve Bank President John Williams and Chicago Fed President Austan Goolsbee — pushed back on rate cut expectations.

Still, markets are pricing in a 90% 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 68.5%, compared to 28% just a month ago.

U.S. economic updates set for release on Monday include the homebuilder confidence index for December, due at 10 a.m. Eastern.

What are analysts saying

“That signal from the Fed marked a big shift from the ‘higher for longer’ narrative on rates, which had briefly taken the 10-year Treasury yield above 5% in late-October. But the big question is now when these rate cuts might happen, and on Friday we had some mild pushback from Fed officials against the market excitement,” said Henry Allen, strategist at Deutsche Bank.

“Nevertheless, markets are still pricing in a reasonably aggressive pace of rate cuts taking place next year… Moreover, there are now more than 150bps of cuts priced in between the January 2024 and January 2025 meetings, and most of the time we’ve seen that pace of cuts historically, it’s been because of a recession,” Allen added.