Treasury Yields Inch Lower Ahead of Fed Decision

Wednesday morning witnessed declines in Treasury yields across the two- to 30-year spectrum following the revelation that wholesale prices remained stagnant in November. Simultaneously, traders awaited the Federal Reserve's monetary policy update scheduled for later in the day.

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In specific terms:

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) saw a decline of 5.3 basis points, settling at 4.676% compared to the previous day's 4.729%.
• The 10-year Treasury yield (BX:TMUBMUSD10Y) retreated by 4.1 basis points, reaching 4.164% from the late Tuesday figure of 4.205%.
• The 30-year Treasury yield (BX:TMUBMUSD30Y) experienced a decrease of 2.9 basis points, settling at 4.274% from the Tuesday afternoon level of 4.303%.

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All market attention was fixated on the impending Federal Reserve policy decision and the release of interest-rate forecasts, scheduled for 2 p.m. Eastern time. This event would be followed by Chairman Jerome Powell's press conference half an hour later.

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The benchmark 10-year Treasury yield has undergone a notable descent from its 16-year high slightly above 5% in October to dip below 4.2%. This downward trend stems from optimism that subdued inflationary pressures may enable the Fed to cease its trajectory of raising borrowing costs. The year-over-year consumer price index for the last month registered at 3.1%, representing the lowest level since early 2021.

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As of Wednesday morning, market indicators pointed to a 98% probability that the Federal Reserve would maintain interest rates within the range of 5.25% to 5.50%. Additionally, Fed funds traders anticipated a 90.1% likelihood that rates would remain unchanged in the subsequent meeting in January, according to the CME FedWatch Tool.

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With no anticipated shift in policy on Wednesday, the focus shifted to whether Federal Reserve officials align with traders' projections, indicating the possibility of the first rate cut as early as May.

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In tandem with this, new data released on Wednesday indicated that wholesale prices remained unchanged in November, marking another signal of gradually easing inflation.

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TD Securities strategists Oscar Munoz, Gennadiy Goldberg, and Jayati Bharadwaj noted the delicate balance Chairman Powell would need to strike. Acknowledging the strides made in normalizing the economy while resisting the idea of early rate cuts, Powell was expected to exhibit guarded hawkishness in the post-meeting press conference. The strategists anticipated Powell's resistance to the committee's potentially dovish guidance, positioning him to cautiously reinforce a more hawkish stance.