The US Treasury market continued its downturn for the fourth consecutive day, witnessing the 10-year yield surpassing the 4% threshold. This rise reflects investor wariness ahead of the imminent release of the Federal Reserve’s meeting minutes. The 10-year note yields experienced an increase of almost eight basis points, reaching 4.008%, marking the highest level since December 14. While UK bond yields saw an upturn, particularly at the front end, their German counterparts showed modest declines across the yield curve.
Market Movements: Amidst erratic trading, Treasuries managed to mitigate some of their losses, influenced by US manufacturing data hinting at a moderation in price pressures. Traders are now eagerly awaiting the minutes from the Federal Reserve’s recent policy meeting, scheduled for later on Wednesday, seeking insights into whether expectations of substantial interest-rate cuts this year are justified. Swaps pricing currently indicates approximately 146 basis points of cuts through December.
Market Analysis: Gene Tannuzzo, Global Head of Fixed Income at Columbia Threadneedle Investments, noted that the market is in the process of establishing a range. He predicts that 10-year yields are likely to stabilize in the 3.75% to 4.25% range, emphasizing that the bond market has made significant strides, driven by robust gains in the final months of the previous year.
Economic Indicators: The Institute for Supply Management’s (ISM) manufacturing data for December revealed that the prices paid component stood at 45.2, falling well below the estimated 49.5 and weaker than the prior month’s reading of 49.9. Additionally, a separate report indicated a decrease in US job openings for November, reaching the lowest level since March 2021. This adds to the evidence of a cooling labor demand, aligning with concerns expressed by Federal Open Market Committee (FOMC) officials about a potential persistent increase in the unemployment rate.
Anticipation of Fed Minutes: The bond market is placing significant focus on the minutes from the Federal Reserve’s December meeting, scheduled for release at 2 pm in New York. Last month’s meeting triggered a sharp rally in Treasuries after Fed Chair Jerome Powell hinted at discussions regarding interest-rate cuts. The two-year yield, known for its sensitivity to monetary policy, currently hovers around 4.35%, indicating a decrease of about 40 basis points compared to the level before the Fed’s decision last month.
Analyst Perspective: Karl Steiner, Head of Analysis at Skandinaviska Enskilda Banken AB, anticipates the minutes not supporting such sharp cuts. However, analysts will scrutinize any mention of rate cuts, the triggers for such actions, and the potential timing.
