Treasury Yields Plunge as Market Sees Fed Rate Hikes Ending

Treasury yields experienced a significant decline during Tuesday morning's trading session, marking a notable shift following the U.S. holiday weekend. This shift was driven by an increasing belief among fed funds futures traders that the Federal Reserve might not implement any further interest rate hikes in the current economic cycle.

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The yield on the 2-year Treasury note dropped by 8.2 basis points, sliding from 5.077% to 4.995% compared to the levels seen on the previous Friday. Meanwhile, the yield on the 10-year Treasury note witnessed a retreat of 10.2 basis points, decreasing from 4.783% to 4.681%, and the yield on the 30-year Treasury note fell by 6.3 basis points, declining from 4.941% to 4.878%. It's worth noting that the cash market remained closed on Monday due to the observance of the Columbus and Indigenous Peoples holiday.

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Several factors contributed to the shift in Treasury yields as trading resumed after the holiday. The outbreak of conflict between Israel and Hamas, coupled with comments from Federal Reserve officials perceived as dovish, played a significant role in influencing market sentiment.

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On Monday, Fed Vice Chair Philip Jefferson expressed caution, stating that the central bank might need to proceed with care in light of the recent surge in Treasury yields, which had reached levels not seen in 16 years. Additionally, Dallas Fed President Lorie Logan suggested that the increase in long-term yields could potentially lessen the necessity for further interest rate hikes by policymakers.

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The upcoming days will provide a test for the retreat in Treasury yields, as the market awaits the release of data on producer and consumer prices for the month of September, scheduled for Wednesday and Thursday, respectively.

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At present, fed funds futures traders are pricing in an 86.4% likelihood of the Federal Reserve pausing on November 1, according to the CME FedWatch Tool. Furthermore, they anticipate a 72.4% probability of no action being taken by December. This would result in the Federal Reserve's main interest rate target remaining at a 22-year high, fluctuating between 5.25% and 5.5%.

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In terms of upcoming Treasury activities, the U.S. Treasury is slated to conduct auctions of $224 billion in 4-week, 8-week, and 17-week securities on Tuesday, in addition to $46 billion worth of 3-year bonds. These auctions will be closely monitored by market participants as they seek to gauge investor demand and the potential impact on yields.

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