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U.S. government-debt yields fell sharply Wednesday morning as traders assessed a fresh round of U.S. data and positioned ahead of the Federal Reserve’s monetary policy decision, statement and press conference later in the session.
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell 13.2 basis points to 4.225% from 4.357% on Tuesday. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
dropped 10 basis points to 3.956% from 4.056% on Tuesday. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
declined 7.3 basis points to 4.204% from 4.277% on Tuesday.
What’s driving markets
Data released earlier on Wednesday from overseas showed that China’s manufacturing activity contracted for a fourth consecutive month in January — kicking off the round of Treasury buying that began earlier in the day.
That buying picked up more momentum after U.S. data was published. The ADP private-sector employment report showed American businesses created a lower-than-expected 107,000 new jobs in January. In addition, the cost that companies pay to employ workers rose 0.9% in the fourth quarter, the smallest increase in 2½ years.
Investors were also assessing a poorly-received batch of earnings reports from late Tuesday, while looking ahead to the U.S. Federal Reserve’s policy statement at 2 p.m. Eastern time and Chairman Jerome Powell’s press conference soon after for clues on when the central bank might start cutting interest rates.
Fed fund futures traders are pricing in a 97.9% probability that the Fed will leave its benchmark interest-rate target between 5.25% and 5.5%, according to the CME FedWatch Tool. The chance of a 25-basis-point rate cut by March is seen at 56.2%, while the possibility of no change by that month is priced at 42.6%.
Separately on Wednesday, Treasury said it would sell $121 billion in notes and bonds next week.
What analysts are saying
“When it comes to the Fed, it’s widely expected they’ll leave rates unchanged today, so the big question instead is what they signal about the timing and speed of rate cuts moving forward,” said strategist Jim Reid and others at Deutsche Bank. “That’s something they’ve explicitly acknowledged, since their dot plot at the last meeting in December penciled in 75 basis points of cuts this year, which triggered a significant market rally in response.”
“Our U.S. economists expect the FOMC [Federal Open Market Committee] to leave behind its tightening bias, and think the post-meeting statement will likely drop the reference to ‘the extent of additional policy firming’. In terms [of] the next meeting in March, they think Powell will leave the door open for a potential cut, but will not express urgency around cutting rates, thus keeping open the timing of any move,” the Deutsche Bank team wrote in a note.
