The 10-year Treasury Yield Holds Above 4% as Traders Digest the Latest Fed Speech

As of Tuesday morning, U.S. bond yields exhibited stability as market participants assimilated the latest statements from a Federal Reserve official, while anticipating the upcoming significant inflation update later in the week.

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The 2-year Treasury yield experienced a modest increase of 2.4 basis points, reaching 4.367% from Monday's level of 4.343%. Simultaneously, the 10-year Treasury yield saw a rise of 2.6 basis points, reaching 4.027% compared to the late Monday figure of 4.001%. The 30-year Treasury yield also showed a slight uptick, advancing by 1.3 basis points to 4.185% from 4.172% on Monday afternoon.

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The focal point of the market's attention remains the Federal Reserve's policy interest rate trajectory, with officials continuing to hedge their forecasts. Fed Governor Michelle Bowman, in remarks late on Monday, acknowledged the possibility of inflation easing further without necessitating additional rate hikes. However, she also highlighted the risk that the recent easing in financial conditions could potentially lead to a resurgence in economic growth or inflation.

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A survey released by the New York Fed in December revealed a decline in consumers' one-year inflation expectations to their lowest levels since January 2021, alongside decreases in medium- and long-term expectations. Against this backdrop, market participants are eagerly awaiting the release of the December U.S. Consumer Price Index on Thursday, followed by a producer prices report the next day.

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Tuesday's economic data release showed a 2% narrowing of the U.S. trade deficit to $63.2 billion in November, coinciding with a Treasury auction of $52 billion of 3-year notes scheduled for 1 p.m. Eastern time.

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The market, as reflected in the CME FedWatch tool, currently assigns a 95.3% probability to the scenario where the Fed maintains interest rates within the 5.25%-5.5% range on January 31. Meanwhile, the likelihood of at least a 25-basis-point rate cut by March is assessed at 61.9%, a decrease from the 79% estimate observed a week earlier.

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Amid emerging concerns on Tuesday about global GDP growth and profit growth, analysts at Macquarie, including Thierry Wizman, Trang Thuy Le, and Gareth Berry, highlight a positive development in the form of declining inflation and inflation expectations. Their perspective suggests an anticipation that the Federal Open Market Committee (FOMC) will shift its policy bias to a more "neutral" stance at the upcoming January 31 meeting. This nuanced outlook underscores the intricate interplay of economic indicators and central bank decisions influencing the current dynamics of the bond market.