Treasurys Mostly Sell Off as Traders Weigh a Possible Pivot by the Fed Early in the Year

On Monday morning, Treasury yields experienced an upward trajectory as traders deliberated over arguments opposing a dovish policy shift by the Federal Reserve in early 2024. Concurrently, positive data revealed an increase in homebuilders' confidence this month.

‍

The yield on the 2-year Treasury (BX: TMUBMUSD02Y) exhibited a marginal uptick of less than 1 basis point, moving from 4.455% on Friday to 4.463%. Yields, which move inversely to prices, demonstrated this subtle shift. Similarly, the yield on the 10-year Treasury (BX: TMUBMUSD10Y) recorded an increase of 3.6 basis points, rising from 3.927% to 3.963%. The 30-year Treasury yield (BX: TMUBMUSD30Y) climbed by 4.6 basis points, reaching 4.072% from the previous 4.026% on Friday.

‍

The primary catalyst behind these market movements lies in the aftermath of the Federal Reserve's perceived policy pivot last week. Both the benchmark 10-year Treasury yield and its 30-year counterpart remained in close proximity to their lowest levels since July. This reaction was prompted by the Federal Reserve's announcement of a potential 75 basis points in rate cuts for 2024, with Chairman Jerome Powell delivering unexpectedly dovish comments during his press conference.

‍

Nevertheless, the initial optimism has waned in recent days as prominent Fed officials, such as New York Federal Reserve Bank President John Williams and Chicago Fed President Austan Goolsbee, pushed back against expectations of rate cuts. Adding to this discourse, Bill Dudley, the former New York Fed president and precursor to Williams, asserted in a Bloomberg column on Monday that the central bank is staking its reputation on a scenario of further declines in inflation, setting the stage for earlier and more aggressive rate cuts.

‍

Market indicators currently suggest a 91.7% probability that the Fed will maintain interest rates between 5.25% and 5.5% on January 31, according to the CME FedWatch Tool. Notably, the likelihood of a 25-basis-point rate cut by the subsequent meeting in March has risen to 65%, up from 28% a month ago.

‍

In terms of economic updates on Monday, the U.S. witnessed a rise in homebuilder confidence for December, marking the first positive shift in five months. This positive development was attributed to a decline in mortgage rates.

‍

Internationally, both European Central Bank President Christine Lagarde and Bank of England Gov. Andrew Bailey have taken a firm stance against discussions of potential rate cuts in their respective regions, underscoring a broader global context of central banks grappling with divergent monetary policy expectations.