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Treasury Rally Cools as Fed Signals There’s No Rush to Cut Rates

(Bloomberg) — US Treasuries pared their gains Wednesday after the Federal Reserve kept interest-rates steady but signaled it’s not in a rush to ease policy.

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The Fed’s policy statement chipped away at the rally from earlier in the day, when yields slid as data showed a cooling in the labor market, tech stocks stumbled and an unexpected quarterly loss at a New York bank reignited concerns about the financial health of regional lenders.

Yields remained down on the day, with the two-year Treasury rate down around 6 basis points at 4.27% soon after the Fed’s announcement at 2 p.m. New York time, after falling as much as 15 basis points earlier. The 10-year yield — a baseline for mortgages and corporate loans — was down by a similar amount at 3.98%.

The Fed’s statement that it doesn’t expect to cut rates until it’s more confident inflation is moving sustainably toward its target chipped away at confidence in financial markets that it would start doing so as soon as March. That anticipation has pulled down bond yields sharply since late last year, pushing up stock prices and easing financial conditions.

Investors are now waiting for Fed Chair Jerome Powell’s remarks for further clarity.

Rate-cut expectations were bolstered by job creation and labor costs data released earlier Wednesday. At the same time, investors sought havens after New York Community Bancorp’s shares tumbled when it reported an unexpected quarterly loss, evoking the worries about the US banking system that flared last year after the collapse of Silicon Valley Bank.

The Treasury rally underpinned government bonds globally, with bigger yield declines in several euro-zone markets after slower-than-expected French inflation readings helped the outlook for European Central Bank interest-rate cuts.

Ahead of the Fed’s announcement, traders added to bets on rate cuts in 2024, with the first one in March about two-thirds priced in versus one-third on Tuesday. Almost 150 basis points of rate cuts were priced in for the entirety of 2024, up from around 135 basis points.

Earlier, bonds drew support from the January ADP employment report and data on fourth-quarter employment costs — both of which increased less than estimated — as well as from the Treasury’s announcement of auction sizes for the February-to-April quarter. Treasury said the increases it made were likely to be the last ones for at least several quarters.

The data are “aligning nicely, with front end markets under-pricing the probability of a cut in March,” Ed Al-Hussainy, global rates strategist at Columbia Threadneedle, said ahead of the Fed’s announcement.

Al-Hussainy downplayed the impact from the New York Community Bancorp, though, saying it has “no systemic” value. “I guess it’s not a happy day for their shareholders, but otherwise it’s irrelevant,” he said.

–With assistance from Edward Bolingbroke and Alexandra Harris.

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