Buyers reenter market and Fed officials emphasize caution on rate cuts, leading to decrease in Treasury yields
After two days of losses, the U.S. government-debt market saw a resurgence of buyers on Tuesday, causing Treasury yields to decrease. This came as Federal Reserve officials emphasized the need to keep interest rates unchanged, adding a note of caution to expectations of rate cuts.
The yield on the 2-year Treasury dropped 6.4 basis points to 4.406% from 4.470% on Monday. Similarly, the yield on the 10-year Treasury fell 7.2 basis points to 4.091% from 4.163% on Monday. The yield on the 30-year Treasury retreated 4.9 basis points to 4.296% from 4.345% on Monday.
This reversal in Treasury yields followed significant advances on Monday. Both the 10-year and 30-year Treasury yields experienced their biggest two-day advances since June 2022 and March 2020, respectively. The 2-year rate also had its biggest two-day advance since May of last year.
The driving force behind this market movement was the reinforcement by regional Fed bank officials of the central bank’s need to delay any rate cuts this year. Cleveland Fed President Loretta Mester emphasized the importance of waiting for sufficient evidence that inflation is sustainably moving back to 2% before making any hasty decisions. Neel Kashkari of the Minneapolis Fed echoed this sentiment, stating that they are not yet at a point where inflation is a concern.
The Treasury market was further supported by the decent demand seen at the auction of 3-year notes, totaling $54 billion. This positive response helped maintain the buying momentum on Tuesday. Traders are now looking ahead to Wednesday’s auction of 10-year Treasurys, with expectations that it will also see strong demand.
Fed-futures traders are pricing in an 80.5% probability that the central bank will leave its benchmark interest rates unchanged at between 5.25% and 5.5% after its meeting on March 20. However, there is a 66.1% probability of at least a 25-basis-point rate cut by the subsequent meeting in May. It is widely expected that the central bank will reduce its fed-funds rate target to at least between 4% and 4.25% by December.
In other news, the Securities and Exchange Commission (SEC) has taken steps to tighten its oversight of the Treasury market. The SEC has imposed new rules that will require many private funds to register as dealers, increasing regulation in this sector.
Overall, the return of buyers to the Treasury market and the cautious stance of Fed officials on rate cuts have led to a decrease in Treasury yields. Traders are now closely watching upcoming auctions and the future actions of the central bank to gauge the direction of the market.
