Treasury yields fell on Thursday but stayed near the top of their recent ranges ahead of U.S. manufacturing and service sector surveys and more more Federal Reserve speakers.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
was barely changed at 4.675%. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 1.1 basis points to 4.310%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
dipped 1.3 basis points to 4.468%.
What’s driving markets
The 10-year Treasury yield was trading above 4.3% and near the top of its 12-week range after the minutes of the Federal Reserve’s last policy meeting released late Wednesday showed the central bank remained wary of starting to cut interest rates too soon.
A poorly-received 20-year Treasury auction earlier on Wednesday had added to the upward pressure on yields. The Treasury will auction $9 billion of 30-year TIPS at 1 p.m. Thursday.
There are a number of Fed officials due to speak Thursday, including Fed Vice Chair Philip Jefferson makes comments at 10 a.m., Philadelphia Fed President Patrick Harker talks at 3:15 p.m., Fed Gov. Lisa Cook and Minneapolis Fed President Neel Kashkari both speak at 5 p.m.
U.S. economic updates set for release on Thursday include weekly initial jobless benefit claims at 8:30 a.m. Eastern, S&P flash services and manufacturing PMIs for February at 9:45 a.m., and January existing home sales at 10 a.m.
Markets are pricing in a 95.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut by the subsequent meeting in May has fallen to 27.4%, down from 84% just a month ago.
The central bank is expected to take its Fed funds rate target back down to around 4.555% by December 2024, according to 30-day Fed Funds futures.
What are analysts saying
“Since the Fed pivot on December 13, consumers have become much more optimistic about the economic outlook,” said Torsten Slok, chief economist at Apollo. See chart below.
“Combined with record-high IG issuance, high HY issuance, and more IPO and M&A activity since December, it is not surprising that employment and inflation rebounded in January and jobless claims remain low.” he adds.
“The last mile is harder not because of some structural feature in the economy, but because of the Fed turning dovish too soon, triggering a reacceleration in growth and inflation. That is why the Fed will keep rates higher for longer than markets expect,” Slok concludes.
