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10-year Treasury yield drops to lowest since July as market absorbs sale of 5-year notes

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U.S. bond yields fell on Wednesday as investors continued to bet that inflation will ease and the Federal Reserve will cut interest rates in 2024, with rates extending their drop in the afternoon after the Treasury Department sold a slug of 5-year Treasury notes.

What’s happening

The yield on the 2-year Treasury note
BX:TMUBMUSD02Y
fell 4.3 basis points to 4.242%, its lowest finish since May 17, based on 3 p.m. Eastern time levels, according to Dow Jones Market Data. Yields and bond prices move opposite to each other.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
dropped 9.7 basis points to 3.788%, its lowest finish since July 19.

The yield on the 30-year Treasury bond
BX:TMUBMUSD30Y
declined 9.8 basis points to 3.944%, the lowest since July 26.

What’s driving markets

Benchmark U.S. bond yields extended their drop after market participants absorbed the sale of $58 billion in 5-year Treasury notes
BX:TMUBMUSD05Y.

Yields had declined as investors continued to bet that the easing of inflation, which dampened down to 3.1% in November, means that the Federal Reserve will lower borrowing costs next year.

The auction produced a high yield of 3.801%, down from 4.42% at the last sale of 5-year supply in October. The bid-to-cover ratio — a measure of bids versus the amount on sale — was 2.50, up from 2.46 in the October auction.

Markets, meanwhile, are pricing in an 85.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on Jan. 30-31, according to the CME FedWatch tool.

“A moderation in headline and core inflation has created a pathway for central banks to ease off on restrictive policies,” said Stephen Innes, managing partner at SPI Asset Management.

“As inflation subsides, the Federal Reserve sees higher real rates becoming increasingly economically unfavorable, possibly reducing the necessity for policy rates to remain in prohibitive territory,” Innes added.

The chances of at least a 25-basis-point rate cut at the Fed’s subsequent meeting in March is priced at 84.6%. Indeed, traders reckon that by December 2024, the central bank’s main rate will be at least down to a range of 3.75% to 4.0%.

Dollar hits 5-mth low against euro as Fed seen closer to rate cuts

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