Treasury Yields Dip as Traders Await Powell's Testimony and Jobs Data in the Coming Days

Early on Tuesday, U.S. bond yields experienced a decline as market participants eagerly awaited midweek testimony from Federal Reserve Chair Jay Powell and the release of February jobs data on Friday.

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Here's a breakdown of the key developments:

• The yield on the 2-year Treasury decreased by 2.3 basis points to 4.587%.
• The yield on the 10-year Treasury slipped 2.4 basis points to 4.192%.
• The yield on the 30-year Treasury eased 2 basis points to 4.333%.

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The prevailing market sentiment exhibited a mild risk-off tone globally, prompting increased demand for Treasuries on Tuesday. Traders are keeping a close watch on potential catalysts in the upcoming sessions.

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Federal Reserve Chair Jay Powell is scheduled to deliver testimony to Congress on Wednesday and Thursday. This, coupled with the release of the February nonfarm payroll report on Friday, is anticipated to solidify expectations regarding the probable trajectory of Fed policy.

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Presently, the market indicates a 97% probability that the Fed will maintain interest rates within the range of 5.25% to 5.50% after the upcoming meeting on March 20th, as per the CME FedWatch tool. Notably, the likelihood of a 25 basis point rate cut by the subsequent meeting in May has declined to 23.7%, down from 62.3% just a month ago. The odds of a similar rate cut in June stand at 65.1%.

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Traders foresee the central bank reducing its Fed funds rate target to around 4.57% by December 2024, according to 30-day Fed Funds futures.

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On the economic front, the U.S. is set to release January factory orders and February ISM service sector activity at 10 a.m. Eastern on Tuesday. Additionally, key central bank officials, including Fed Vice Chair for Supervision Michael Barr, are scheduled to make comments at noon and 2:15 p.m.

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Analysts are weighing in on the current market dynamics. Stephen Innes, managing partner at SPI Asset Management, emphasized the challenging nature of predicting a substantial departure from recent guidance provided by other policymakers. Innes expects a more hawkish tone from Federal Reserve Chair Jerome Powell, considering persistent inflationary pressures, accommodative financial conditions, steady economic growth, and robust labor market conditions. However, any shift in policy stance is likely to be gradual and cautious, acknowledging the uncertainties in the economic outlook and potential impacts of monetary policy adjustments. Powell's messaging is expected to reflect a balanced approach, emphasizing the need for vigilance on inflation while supporting economic recovery.

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