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Bond yields fell on Tuesday as investors continued to price in interest rate cuts next year by major central banks.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell by 1.7 basis points to 4.633%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated 1.2 basis points to 4.247%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
fell 1 basis point to 4.403%.
What’s driving markets
Government bond yields nudged lower as investors continued to price in expectations that major central banks would start cutting interest rates in 2024.
Ten-year German bund yields
BX:TMBMKDE-10Y,
the European benchmark, fell 5.4 basis points to 2.305%, their lowest since June, after Isabel Schnabel, a European Central Bank board member known for her normally hawkish stance, declined to rule out interest-rate cuts next year.
Traders are now pricing in 150 basis points of cuts by the European Central Bank next year, up from just 75 basis points just a few weeks ago, according to Bloomberg data.
The ECB’s main deposit rate is currently at a record high of 4%, but inflation, which last year hit a peak above 10% is now down to 2.4%, just above the central bank’s 2% target.
The shift in ECB thinking dovetails with expectations of a pivot from its U.S. peer. Markets are pricing in a 99.9% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th, and an 86% chance it will do the same in January, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut at the subsequent meeting in March, is priced at 62%, up from 25.5% a month ago.
Investors will be hoping that a batch of U.S. jobs data due this week will support this scenario of easier policy in coming months by showing the labor market continues to cool and will thus assist the Fed in its battle to further damp inflationary pressures.
The JOLTS, or job openings report, will be released at 10 a.m. Eastern on Tuesday, followed on Wednesday by the ADP survey of private sector hiring, the weekly unemployment claims data on Thursday, and the nonfarm payrolls report on Friday.
Other U.S. economic updates set for release on Tuesday include the S&P services purchasing managers’ index for November at 9:45 a.m., and the ISM services for November report at 10 a.m.
What are analysts saying
“Either soft [jobs] data will cement the Fed rate cut bets or robust data will inject uncertainty and volatility to the market…But note that the U.S. jobs market was impacted by strikes last month, [that] negative impact could turn out to be positive for this month, and the latter could eventually blur the visibility of the health of the U.S. jobs market,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Presently, the markets price in around 125 basis points of cuts from the Fed next year, that’s obviously significantly lower than where the Fed sees its rate by the end of next year. The Fed optimism looks overstretched,” she added.
