Bond Yields Rise as Central Bank Officials Question Rate Cut Expectations

The yields on US Treasury bonds experienced a rise at the start of Tuesday’s trading session. This was due to several central bank officials expressing concerns about the overly optimistic outlook for interest rate cuts in 2024.

Key Details

• The yield on the 2-year Treasury bond increased by 7.5 basis points to 4.211%. It is important to note that bond yields move in the opposite direction to prices.
• Similarly, the yield on the 10-year Treasury bond rose by 6.7 basis points to 4.011%.
• Moreover, the yield on the 30-year Treasury bond climbed by 6.6 basis points, reaching 4.243%.

Market Influences

Federal Reserve Governor Christopher Waller is scheduled to deliver a speech at 11 a.m. Eastern Time on the economic outlook and monetary policy. Investors are eager to hear if his views align with those of his colleagues and international peers, who have been pushing back against the market’s expectations of numerous interest rate cuts this year.

Currently, traders are predicting a 95.3% probability that the Federal Reserve will maintain interest rates within the range of 5.25% to 5.50% during their next meeting on January 31st, according to the CME FedWatch tool.

However, there is a 69.5% chance that there will be at least a 25 basis point rate cut by the subsequent meeting in March. Furthermore, market expectations indicate that the central bank will gradually lower its target for the Fed Funds rate to approximately 3.83% by December 2024, as suggested by the 30-day Fed Funds futures data.

Central Banks Exercise Caution Amid Inflation Concerns

Several Federal Reserve officials have recently expressed caution regarding predictions of approximately six interest rate cuts of 25 basis points in 2024. Their hesitancy stems from the fact that inflation remains at 3.4%, surpassing the central bank’s target of 2%.

Similarly, European officials are also eager to dampen expectations of rate cuts. A member of the European Central Bank’s governing council, Robert Holzmann, highlighted in a recent interview at Davos that lingering inflation could deter the ECB from lowering interest rates this year.

Francois Villeroy de Galhau, the Chief of the French central bank, echoed Holzmann’s sentiment by stating that celebrating victory over inflation is premature.

The global rates and currencies research team at Bank of America emphasized that the most crucial topic currently circulating in the market is not whether G10 central banks will reduce policy rates, but rather when and at what pace. They further underscored the need to consider the implications of a scenario in which central banks maintain their current rates, a consensus that may appear unrealistic to some.

In addition, the team at Bank of America expressed their bemusement over the market’s aggressive expectation of rate cuts this year.

Today, notable economic updates from the United States include the releasing of the Empire State manufacturing report for January at 8:30 a.m. Eastern time.