Treasury yields hover at summer lows after dovish Fed drives bond rally

United States

Treasury yields were mostly steady to lower on Friday, but hovering at summer lows after a surprise shift in the Federal Reserve’s stance at its meeting earlier in the week.

What’s happening

  • The yield on the 2-year Treasury BX:TMUBMUSD02Y fell 1 basis point to 4.38%. On Thursday, the yield fell 8 basis points to 4.397%, the lowest since June 1.
  • The yield on the 10-year Treasury BX:TMUBMUSD10Y dipped 1 basis point to 3.91%. Thursday’s session saw that yield drop 10.3 basis points to 3.929%, the lowest since July 26.
  • The yield on the 30-year Treasury BX:TMUBMUSD30Y was steady at 4.039%. That yield fell 13 basis points to 4.053% on Thursday, the lowest since July 31.

What’s driving markets

The U.S. bond market has rallied this week following the Fed’s mid-week meeting, where it projected interest rate cuts for 2024 and indicated the rate-hike phase was now over.

Read: History shows even the Fed can’t really predict what it does with interest rates a year out

Markets are pricing in an 85.5% probability that the Fed will leave its benchmark interest rate unchanged again in January, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by its subsequent meeting in March was seen at 68.5%, up from 64.5% just a week ago. And traders were mostly expecting the central bank to take its fed-funds rate target down to around 3.875% or lower by next December.

Thursday’s data showed the economy remains buoyant into the holiday season, with retail sales up, weekly jobless benefit claims coming in even lower and falling import prices.

Friday will see the release of the New York Empire State manufacturing survey for December due at 8:30 a.m. ET and U.S. industrial production and capacity utilization at 9:15 a.m. ET.

In comparison to the Fed, the Bank of England and European Central Bank each left interest rates unchanged on Thursday, as the heads of those institutions each indicated it was too early to talk about interest rate cuts.

But pressure on the ECB to cut rates may not be far behind into the new year as weak purchasing managers data from both Germany and France drove the yield on the 10-year German bund BX:TMBMKDE-10Y 7 basis points lower to 2.044%.