Bond yields experienced a slight decline on Monday, hovering near their lowest levels since the summer months. Traders remained focused on dissecting the Federal Reserve’s recent statements regarding the potential path of interest rates.
The 10-year Treasury yield, a key benchmark, currently rests near its lowest point since July.
Its most recent decline was prompted by the Federal Reserve’s apparent shift in policy last week.
Market indicators currently suggest a 90% likelihood that the Fed will maintain interest rates within a range of 5.25% to 5.50% following its upcoming meeting on January 31st, according to the CME FedWatch tool. However, pricing for a 25 basis point rate reduction at the subsequent meeting in March stands at 68.5%, a considerable increase from just one month ago when it was at 28%.
Henry Allen, a strategist at Deutsche Bank, commented on the recent shift in Fed policy, stating, “The signal from the Fed marked a significant departure from the previous narrative of ‘higher for longer’ interest rates, which briefly pushed the 10-year Treasury yield above 5% in late October. However, the question now centers around when these rate cuts might occur. On Friday, we witnessed some mild pushback from Fed officials against the market’s excitement.”
“Regardless,” Allen continued, “markets are still pricing in a fairly aggressive pace of rate cuts for next year. Furthermore, there exists an expectation of over 150 basis points of cuts between the January 2024 and January 2025 meetings. Historically, such a rate of cuts has typically been driven by economic recessions.”