Treasury Yields Are Near 2024 Lows as the Market Awaits Further Clues on How Fast the Fed Will Cut Rates

On Tuesday, bond yields edged slightly higher but continued to hover near their lowest levels of the year as investors awaited crucial economic data that could influence the Federal Reserve's decision on interest rates.

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Current Market Movements

The yield on the 2-year Treasury note increased by 1 basis point, reaching 3.950%. Similarly, the 10-year Treasury yield climbed by 4 basis points to 3.855%, and the 30-year Treasury yield rose by 3 basis points, settling at 4.145%. It's important to note that bond yields move inversely to their prices, meaning when prices go up, yields go down, and vice versa.

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Market Drivers

The benchmark 10-year Treasury yield remains just above 3.8%, only a few basis points away from its lowest levels in 2024. This stability reflects a market that has largely adjusted to the anticipated direction of Federal Reserve policy. Last week, Federal Reserve Chair Jerome Powell indicated that the central bank is poised to begin lowering interest rates at its upcoming Federal Open Market Committee (FOMC) meeting on September 18.

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The primary concern for investors now is the speed at which the Fed will implement these rate cuts. This pace will likely be determined by upcoming economic data, which is expected to provide critical insights into the health of the economy. Powell has emphasized that he is particularly focused on the labor market, making the nonfarm payrolls report, due on September 6, a key indicator to watch.

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Before the payrolls report, however, investors will closely analyze the Personal Consumption Expenditures (PCE) Price Index, set to be released on Friday. The PCE Price Index is the Fed's preferred measure of inflation and will offer important clues about inflationary pressures in the economy.

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In addition to these data releases, the Treasury Department will conduct several significant bond auctions this week. On Tuesday, the results of a $69 billion auction of 2-year notes will be announced, followed by auctions of 5-year and 7-year notes later in the week. The outcomes of these auctions will provide further insights into market sentiment and demand for U.S. government debt.

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As investors digest these developments, the market is currently pricing in a 71.5% chance that the Fed will reduce interest rates by at least 25 basis points at its September 18 meeting, bringing the current range of 5.25% to 5.50% down slightly. However, the likelihood of a more substantial 50 basis point cut has diminished significantly, dropping to 28.5% from around 50% just a few weeks ago.

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Looking further ahead, the central bank is expected to lower its fed-funds rate target to approximately 4.54% by the end of the year, according to 30-day Fed Funds futures. This projection underscores the market's anticipation of a more dovish stance from the Fed as economic data continues to evolve.

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Analyst Insights

Market experts are closely monitoring the economic calendar for key data releases that could influence the Fed's decisions. Larry Milstein, managing director of government and agency trading at R.W. Pressprich & Co., highlighted the importance of upcoming reports and events in an interview with MarketWatch. He noted that the Nvidia earnings report on Wednesday and the economic data scheduled for later in the week are of particular interest to investors.

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Milstein also pointed out that San Francisco Fed President Mary Daly recently reiterated Powell's stance, emphasizing that any rate cuts will be data-dependent. He suggested that the market might have been overly optimistic in its expectations for rate cuts, reflecting a possible disconnect between market pricing and the Fed's actual intentions.

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Looking ahead, Milstein mentioned that Atlanta Fed President Raphael Bostic is scheduled to speak on Wednesday. Bostic is known for his centrist views, and Milstein does not anticipate any significant deviation from Powell's recent comments. This consistency among Fed officials reinforces the idea that the Fed's future actions will be closely tied to the incoming economic data.

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Conclusion

As bond yields inch higher and market participants await key economic reports, the focus remains squarely on the Federal Reserve's next moves. While the market has largely priced in an initial rate cut, the pace and magnitude of future cuts will depend on how the economy performs in the coming weeks. Investors will continue to scrutinize every piece of data for clues about the Fed's path forward, with particular attention to the labor market and inflation indicators.

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