Bond yields fell on Wednesday as concerns about global growth lingered and traders looked ahead to U.S. inflation data.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.240%
slipped by 2.1 basis points to 4.241%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.581%
retreated 4.3 basis points to 3.578%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.706%
fell 6 basis points to 3.695%.
What’s driving markets
Treasury yields were softer on Wednesday after the World Bank warned the global economy risked slipping into recession this year. The prognosis follows similarly downbeat comments from the International Monetary Fund last week.
Weak growth may help the Federal Reserve in its battle against inflation and reduce the need for more increases in borrowing costs.
Crucial consumer price inflation will be published on Thursday. Bond investors will want to see a further decline from November’s 7.1%, with economists forecasting a December rate of 6.5%. CPI inflation peaked at 9.1% in June.
Markets are pricing in a 79.2% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool.
The central bank is expected to take its Fed funds rate target to a cycle peak of 4.92% by June 2023, but to reduce rates to 4.52% by December, according to 30-day Fed Funds futures.
That terminal rate below 5% and the prospects of a rate cut next year is a more dovish scenario than Fed officials currently countenance, but bond guru Jeffrey Gundlach says the market is right and the Fed wrong.
“My 40 plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says,” the DoubleLine Capital LP chief investment officer told listeners on a webcast Tuesday, Bloomberg reported.
The U.S. Treasury will auction $32 billion of 10-year bonds on Wednesday.
What analysts are saying
A speech by Fed chair Jay Powell on Tuesday was perhaps notable for what he did not say, reckoned Brian Daingerfield, head of G10 FX Strategy, US at NatWest Markets.
“Powell opted not to use the speaking opportunity to comment on recent market conditions, including the post-NFP/ISM shift in market pricing for the February meeting. While sticking to the script is hardly an overtly dovish development, we know from past experience that Powell has not hesitated to hijack panel discussions to send the market a message if he felt it urgently needed.”
“From that perspective, it was notable to me that Powell eschewed the opportunity to at least warn the market about getting too complacent, a message that was echoed in last week’s December’s meeting minutes,” said Daingerfield in a note to clients.
This post was originally published on Market Watch
