Ten-year Treasury tops 4% as central banks try to cool traders’ rate-cut optimism

Bond yields rose early Tuesday after more central bank officials indicated markets were getting too optimistic about the pace of interest rate cuts in 2024.

What’s happening

The yield on the 2-year Treasury
BX:TMUBMUSD02Y
added 7.5 basis points to 4.211%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 6.7 basis points to 4.011%.

The yield on the 30-year Treasury
BX:TMUBMUSD30Y
climbed by 6.6 basis points to 4.243%.

What’s driving markets

Federal Reserve Governor Christopher Waller will speak on the economic outlook and monetary policy at 11 a.m. Eastern, with investors keen to see if he matches colleagues and international peers in pushing back against the markets expectations for a raft of interest rate cuts this year.

Traders are pricing in a 95.3% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st, according to the CME FedWatch tool.

However, the chances of at least a 25 basis point rate cut by the subsequent meeting in March is priced at 69.5%, and the central bank is expected to take its Fed funds rate target back down to around 3.83% by December 2024, according to 30-day Fed Funds futures.

Several Fed officials in recent days have implied that the idea of about six cuts of 25 basis points in 2024 is premature given inflation at 3.4% remains above the central bank’s 2% target.

And in Europe, officials also appear keen to cool the market’s rate cut hopes. European Central Bank governing council member Robert Holzmann said in an interview on Monday at Davos that lingering inflation may stop the ECB from cutting interest rates this year.

And French central bank chief Francois Villeroy de Galhau said on Tuesday that it was too early to proclaim victory on inflation.

“The most important discussion in the market as the new year has started is not if, but when and how fast G10 central banks will start to cut policy rates,” said the global rates and currencies research team at Bank of America in a note.

“Even if a scenario of central banks staying on hold this year may seem completely unrealistic to the consensus, it is still worth considering its market implications in our view, as we are puzzled by the aggressive market pricing of rate cuts this year,” the team at BoA added.

U.S. economic updates set for release on Tuesday include the Empire State manufacturing report for January, due at 8:30 a.m. Eastern.

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