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Treasury yields rise by most in a month or more as U.S., European central bankers try to cool rate-cut optimism

Treasury yields posted their biggest one-day jumps in one or two months on Tuesday after central bank officials in the U.S. and Europe pushed back on market expectations for the timing and pace of 2024 interest-rate cuts.

What happened

  • The yield on the 2-year Treasury BX:TMUBMUSD02Y jumped 9 basis points to 4.226% from 4.136% on Friday.
  • The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 11.5 basis points to 4.064% from 3.949% on Friday.
  • The yield on the 30-year Treasury BX:TMUBMUSD30Y climbed 10.6 basis points to 4.303% from 4.197% on Friday.
  • Tuesday’s moves were their biggest one-day advances for the 2- and 10-year rates since Dec. 8, as well as the biggest for the 30-year rate since Nov. 9, based on 3 p.m. Eastern time figures from Dow Jones Market Data. U.S. financial markets were closed on Monday for the Martin Luther King Jr. Day holiday.

What drove markets

Treasury yields jumped on Tuesday as traders focused on remarks from central bankers in Europe and the U.S.

Federal Reserve Gov. Christopher Waller, in comments to the Brookings Institution, confirmed that rate cuts are still ahead, but that there is no need to be “rushed” about it.

Also on Tuesday, French central bank chief François Villeroy de Galhau, a member of the European Central Bank’s governing council, said “we should be patient” about cutting rates. Another ECB member, Robert Holzmann, said in an interview on Monday at Davos that lingering inflation may stop the ECB from cutting interest rates this year.

Traders priced in a 97.4% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Jan. 31, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by March was seen at 66.9%, and the central bank is mostly expected to take its fed-funds rate target down to between 3.75%-4% by December or even lower.

See also: No rate cuts in 2024? Why investors should think about the ‘unthinkable’

In U.S. data released on Tuesday, the New York Fed’s Empire State manufacturing-activity gauge plunged 29.2 points in January to negative 43.7, or the lowest level since the depth of the pandemic in May 2020.

What analysts are saying

“A hawkish mood has prevailed in markets this year, and comments from the Fed’s Waller today seemed to add fuel to that fire, at least initially. But given how aggressively rate cuts were priced in late last year, investors are still discounting a huge amount of easing in 2024 and 2025 — rightly so, in our view,” said James Reilly, a markets economist at Capital Economics.

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