The yield on 10-year U.S. Treasuries has dropped below 4% for the first time since August, following signals from the Federal Reserve that it has completed its cycle of interest rate hikes and is inclined toward more aggressive cuts in 2024. This development comes on the heels of the Treasury market’s most substantial one-day rally since March, driven by the Fed’s reassurance that it would not be raising its target range for the overnight lending rate of 5.25%-5.5%. The two-year notes’ rate continued its decline in Asia after a significant drop of 31 basis points in the previous session, while the 10-year yield settled at 3.998%.
In the wake of the Federal Reserve’s final meeting of the year, policymakers released new quarterly forecasts for the overnight lending rate, projecting a median rate of 4.625% by the end of the next year. This represents a downward revision from the median of 5.125% in September. As a result, Fed swap rates anticipating policy changes have been repriced to levels indicating over 140 basis points of easing, compared to around 113 basis points before the meeting.
Jeffrey Rosenberg, a portfolio manager at BlackRock Inc., described this as a “green light for investors,” emphasizing the Fed’s satisfaction with current conditions. He noted that resisting this trend would require fundamental economic data to counter the prevailing sentiment.
The bond market, previously impacted by rising consumer inflation and Fed rate hikes, is now envisioning a reversal that favors higher-value debt issued when yields were higher. This shift is facilitated by inflation receding more quickly than anticipated, even as the economy continues to display resilience.
During Fed Chair Jerome Powell’s post-meeting news conference, yields extended their declines, and a Bloomberg gauge of the dollar dropped 0.2% on Thursday. Powell acknowledged discussions about the timing of rate cuts but emphasized that inflation remains a concern, leaving room for potential rate increases. Expectations for Fed rate cuts in 2024 gained momentum, particularly after the ISM manufacturing report for November fell below expectations on December 1.
Wednesday’s announcements followed the release of November’s producer price data, revealing lower-than-expected inflation. Treasuries also benefited from a rally in gilts and bunds ahead of the Bank of England and European Central Bank meetings.
Leah Traub, a portfolio manager at Lord Abbett & Co., highlighted the market’s anticipation of central bank decisions at the year-end and the shift in the Fed’s reaction function. While acknowledging the market may be getting ahead of itself, Traub emphasized the perceptible change in the Fed’s stance.
Although Treasury yields remain comparatively high in recent historical terms, the shift in the yield curve reflects evolving market expectations, particularly in response to global central bank decisions and economic data releases.
