Treasury Yields Move Higher as Traders Rein Back Rate Cut Optimism Ahead of Fed Minutes

U.S. government-debt yields exhibited an upward trend on Wednesday morning, as diminished expectations for a Federal Reserve rate cut in March took precedence over data related to manufacturing and job openings.

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The yield on the 2-year Treasury (BX:TMUBMUSD02Y) increased by 1.3 basis points to 4.341%, up from 4.328% on the previous Tuesday. Similarly, the yield on the 10-year Treasury (BX:TMUBMUSD10Y) rose by 3.5 basis points to 3.979%, compared to 3.944% recorded on Tuesday afternoon. The 30-year Treasury yield (BX:TMUBMUSD30Y) also saw an uptick of 3.5 basis points, reaching 4.119% from the late Tuesday level of 4.084%.

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Richmond Fed President Tom Barkin's comments on Wednesday influenced market dynamics. He stated that decisions regarding changes in interest rates for the current year would hinge on the conviction regarding ongoing inflation trends and the overall economic performance. Barkin's remarks preceded the scheduled release of minutes from the Federal Reserve's policy meeting on December 12-13 at 2 p.m. Eastern time.

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At the outset of 2024, the market began questioning the prevailing expectations of a Federal Reserve interest rate cut in March. There is growing skepticism that investors might have misunderstood the Fed's eagerness to promptly reduce rates in response to declining inflation.

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Current data from CME FedWatch Tool reveals a 91.2% likelihood of the Fed maintaining its benchmark rate within the 5.25% to 5.5% range by January 31. Furthermore, the probability of a 25-basis-point rate cut by March has reduced to 72.6%, marking a decline from 90.3% recorded a week earlier. Despite this, traders still perceive an 88.8% chance of witnessing five to seven quarter-point rate cuts by December.

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In tandem with these developments, U.S. data released on Wednesday indicated a decrease in job openings to 8.8 million in November from a revised figure of 8.9 million in the previous month. Additionally, the number of people resigning hit a 33-month low at 3.47 million. Manufacturing-sector activity continued its contraction in December, marking the 14th consecutive month of decline, as indicated by ISM's industry-related PMI reading.

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Oscar Munoz, Chief U.S. Macro Strategist at TD Securities, pointed out that while Fed Chair Jerome Powell hinted at the possibility of easing in his post-meeting press conference last month, officials have been resisting the idea of an imminent rate cut since the December Federal Open Market Committee meeting. Munoz anticipates that the upcoming minutes will reveal the FOMC's reluctance to consider rate cuts at this juncture.