U.S. Bond Yields Fall as Investors Bet on Inflation Easing

What's happening

• The yield on the 2-year Treasury BX:TMUBMUSD02Y rose by 1.4 basis points to 4.300%.
• The yield on the 10-year Treasury BX:TMUBMUSD10Y fell 2.7 basis points to 3.873%.
• The yield on the 30-year Treasury BX:TMUBMUSD30Y dropped by 3 basis points to 4.018%.

What's driving markets

Benchmark U.S. bond yields are trading near five-month lows, with investors predicting that the easing of inflation will lead to the Federal Reserve reducing borrowing costs next year. In November, inflation decreased to 3.1%, providing a pathway for central banks to ease off on restrictive policies.

The 10-year note, which reached above 5% in October, is now comfortably below 3.9%, reaching its lowest point since July.

Stephen Innes, managing partner at SPI Asset Management, stated that with the moderation of inflation, the Federal Reserve sees higher real rates becoming economically unfavorable. This potentially reduces the need for policy rates to remain in prohibitive territory.

According to the CME FedWatch tool, markets have priced in an 85.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st. However, there is a 84.6% chance of at least a 25 basis point rate cut at the subsequent meeting in March. Traders believe that by December 2024, the Fed's main rate will decrease to a range of 3.75% to 4.0%.

There are no major economic reports scheduled for Wednesday, so the focus will be on the Treasury's $58 billion auction of 5-year bonds.