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10-year Treasury yield slips further below 4%, heading for lowest level since July

Treasury yields slid to new multi-month lows on Thursday, with the 10-year rate falling to as low as 3.88%, as investors continued to price in the Federal Reserve’s unexpectedly dovish policy pivot from the previous session.

What’s happening

  • The yield on the 2-year Treasury BX:TMUBMUSD02Y fell 7.8 basis points to 4.399% from 4.477% on Wednesday.
  • The yield on the 10-year Treasury BX:TMUBMUSD10Y dropped 9.7 basis points to 3.935% from 4.032% late Wednesday, after touching an intraday low of 3.882%.
  • The yield on the 30-year Treasury BX:TMUBMUSD30Y fell 11.9 basis points to 4.064% from 4.183% Wednesday afternoon.
  • The 10- and 30-year rates were each on track to reach their lowest closing levels since late July.

What’s driving markets

Investors and traders continued to absorb the Federal Reserve’s interest-rate projections and policy update, released on Wednesday.

The widely followed 10-year Treasury yield has fallen more than a full percentage point from the 5.005% intraday high it had recorded on Oct. 23. The magnitude of the overall decline seen since then has now exceeded that which occurred during the onset of the COVID-19 pandemic in the U.S., when the 10-year rate dropped from 1.586% to 0.5755% from Feb. 19, 2020, to April 2, 2020, according to Tradeweb data.

Markets are now pricing in an 81.4% probability that the Fed will leave interest rates unchanged again in January, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by the subsequent meeting in March is priced at 80.4%, up from 64.5% just a week ago. And traders are mostly expecting the central bank to take its fed-funds rate target down to around 3.875% or lower by next December.

In a note, economists at Goldman Sachs, led by Jan Hatzius, wrote that they expect the Federal Open Market Committee “to cut earlier and faster” and are forecasting three consecutive quarter-point cuts to take place in March, May and June.

See also: Bond king calls for 10-year yield to slide much further as Goldman forecasts three Fed cuts in a row

In data released on Thursday, retail sales rose a solid 0.3% in November, a sign that the economy isn’t cooling off much ahead of the holiday shopping season. Initial jobless claims fell 19,000, to a total of 202,000 for the week that ended Dec. 9 — the lowest level since mid-October and well below the 220,000 that had been expected. And import prices fell for a second straight month as inflation eased.

What analysts are saying

“The biggest surprise by the Fed was a reduction in the median expectation for where the policy rate would end 2024. While this level is still above where the market is currently pricing the funds rate, most had anticipated the Fed would use the ‘dot plot’ to push back on the market pricing. The fact that the Fed itself anticipates cuts next year was perceived as dovish by the market,” said Brij Khurana, a Boston-based fixed-income-portfolio manager at Wellington Management.

“The key takeaway for me is that the Fed is not that focused on market implied easing financial conditions, and instead is solely focused on inflation getting to target,” Khurana said in an email. “In their view, despite a buoyant stock market, financial conditions are tight based on the fact that policy rates exceed inflation. They believe that inflation will ease to 2.4% by the end of next year, and therefore, the median policy rate of 4.625% would still be very restrictive in their view.”

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