The 10-year Treasury Yield Slips Below 4% as Goldman Sachs Expects the Fed to Cut Rates in March

Thursday morning witnessed a decline in Treasury yields to fresh multi-month lows, notably with the 10-year rate dropping to 3.92%. This downward trend reflects the continued response of investors to the Federal Reserve's unexpectedly dovish policy shift announced in the previous session.

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In terms of specific yield movements, the 2-year Treasury yield experienced an 11.6 basis points decrease, falling from 4.477% on Wednesday to 4.361%. Simultaneously, the 10-year Treasury yield retreated by 8 basis points, reaching 3.952% from the late Wednesday figure of 4.032%. At its intraday low, the 10-year yield touched 3.925%, indicating a trajectory toward its lowest closing level since around July. The 30-year Treasury yield also saw a decline of 8.3 basis points, reaching just below 4.1% from the Wednesday afternoon figure of 4.183%.

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The driving force behind these market movements remains the Federal Reserve's interest-rate projections and policy update released on Wednesday. While the central bank maintained interest rates at the expected range of 5.25%-5.5%, the surprise came with the indication that it had concluded raising borrowing costs. The Fed signaled a potential rate cut of 75 basis points in 2024, following the consumer-price index's annual headline rate falling to 3.1% in November.

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The noteworthy decline in the 10-year Treasury yield has surpassed a full percentage point from the intraday high of 5.005% recorded on October 23. The overall magnitude of this decline since then exceeds that observed during the onset of the COVID-19 pandemic in the U.S. According to Tradeweb data, during the pandemic, the 10-year rate dropped from 1.586% to 0.5755% from February 19, 2020, to April 2, 2020.

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Market expectations, as reflected in the CME FedWatch Tool, now show an 83.5% probability that the Fed will leave interest rates unchanged by January. Furthermore, the likelihood of at least a 25-basis-point rate cut by the subsequent meeting in March has increased to 81.4%, up from 64.5% just a week ago. Traders are anticipating the central bank to lower its fed-funds rate target to around 3.875% or lower by the end of next December.

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Economists at Goldman Sachs, led by Jan Hatzius, anticipate a proactive approach from the Federal Open Market Committee (FOMC), expecting them "to cut earlier and faster." Goldman Sachs forecasts three consecutive quarter-point cuts in March, May, and June.

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Additional economic data released on Thursday further influenced market dynamics. Retail sales showed a robust increase of 0.3% in November, indicating that the economy is not significantly cooling off in anticipation of the holiday shopping season. Initial jobless claims also provided positive news, falling by 19,000 to 202,000 for the week ending December 9, marking the lowest level since mid-October and surpassing expectations. Additionally, import prices experienced a second consecutive monthly decline, signaling a moderation in inflation.