Treasury yields fall afresh as Goldman Sachs sees Fed cutting rates in March


U.S. bond yields slid to fresh multi-month lows early Thursday as investors continued to price in the Federal Reserve’s unexpectedly dovish policy pivot on Wednesday.

What’s happening

  • The yield on the 2-year Treasury
    BX:TMUBMUSD02Y
    fell by 9.3 basis points to 4.340%.

  • The yield on the 10-year Treasury
    BX:TMUBMUSD10Y
    retreated 7.7 basis points to 3.948%.

  • The yield on the 30-year Treasury
    BX:TMUBMUSD30Y
    fell 5.5 basis points to 4.123%.

What’s driving markets

The 10-year Treasury yield, which in October was trading just above 5%, fell at one point early Thursday to 3.93%, its lowest since July, as investors continued to absorb projections and comments by the Federal Reserve.

The U.S. central bank on Wednesday left interest rates unchanged at a range of 5.25% to 5.50%, as expected, but surprised the market by suggesting it was done raising borrowing costs and would likely cut rates by 75 basis points in 2024 after inflation fell to 3.1% in November.

Markets are now pricing in an 81.4% 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.

But the chances of at least a 25 basis point rate cut at the subsequent meeting in March is priced at 88.6%, up from 63% just a week ago.

That’s a view endorsed by economists at Goldman Sachs, led by Jan Hatzius, who wrote in a note: “In light of the [inflation’s] faster return to target, we now expect the FOMC to cut earlier and faster.”

“We now forecast three consecutive 25bp cuts in March, May, and June to reset the policy rate from a level that the FOMC will likely soon come to see as far offside, followed by quarterly cuts to a terminal rate of 3.25-3.5%, 25bp lower than we previously expected,” the Goldman Sachs team added.

Markets are currently pricing in the central bank taking its Fed funds rate target back down to around 3.85% by December 2024, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Thursday include the weekly jobless claims data, November retail sales and November import prices, all due at 8:30 a.m. Eastern. Business inventories for November will be released at 10 a.m.

U.K. and Germany benchmark bond yields were also tumbling as traders made bets the Federal Reserve’s dovish pivot may be replicated in comments by the Bank of England and European Central Bank.

The monetary guardians of the U.K and eurozone are expected to leave interest rates at 5.25% and 4% respectively on Thursday. But after recent data pointed to weaker economies helping to suppress inflation, investors hope the BOE and ECB may, like the Fed, signal that the next move in borrowing costs is down.

The 2-year U.K. gilt yield
BX:TMBMKGB-02Y,
which started the week around 4.6%, is down 16.7 basis points on the session to 4.205%, while the equivalent duration German note
BX:TMBMKDE-02Y
is off 20 basis points to 2.455%, the lowest since March.

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