What’s Happening
- The yield on the 2-year Treasury BX:TMUBMUSD02Y has fallen by 2.9 basis points to 5.033%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury BX:TMUBMUSD10Y has retreated 6.9 basis points to 4.827%.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y has fallen 7.8 basis points to 4.973%.
Factors Driving the Market
The 10-year Treasury yield has reached the lower end of a 20-basis point range that it has fluctuated within for approximately two weeks, staying between roughly 4.82% and 5.02%.
Several factors are contributing to the rise in prices and subsequent decrease in yields. First, news of China’s manufacturing sector slipping back into contraction in October has fueled concerns about global economic strength and led to increased purchases of fixed income assets.
Secondly, the US Treasury’s announcement on Monday that it plans to borrow less than originally anticipated this quarter, resulting in less issuance of government bonds, has further bolstered bond prices. The Treasury will release its third-quarter refunding program details on Wednesday.
Lastly, the Bank of Japan has made only minor adjustments to its ultra-loose monetary policy on Tuesday, signaling that interest rates in Japan will remain low for a longer period of time. With 10-year Treasuries offering a yield approximately 390 basis points higher than their Japanese counterparts BX:TMBMKJP-10Y, investors are optimistic that US government bonds will remain relatively more appealing for an extended duration.
Federal Reserve Meeting in Focus
The Federal Reserve is set to begin its two-day monetary policy meeting, which is expected to have significant implications for the financial markets.
Interest Rates Likely to Remain Unchanged
Market analysts are currently pricing in a 98% probability that the Fed will maintain interest rates within the range of 5.25% to 5.50% in its announcement on Wednesday, according to the CME FedWatch tool.
Future Rate Hike Outlook
While a rate hike of 25 basis points to a range of 5.50% to 5.75% is not expected at this meeting, the chances of such an increase at the subsequent meeting in December are priced at 24.5%.
Long-term Rate Forecast
Speculation suggests that the central bank will not lower its Fed funds rate target back to around 5% until August 2024, as indicated by the 30-day Fed Funds futures.
Key Economic Updates
On Tuesday, several important U.S. economic updates are scheduled for release. These include the third-quarter employment cost index at 8:30 a.m. Eastern, the August S&P Case-Shiller home price index at 9 a.m., and consumer confidence data for October at 10 a.m..
Analyst Perspectives
According to Stephen Innes, managing partner at SPI Asset Management, the Treasury’s decision to reduce its quarterly borrowing estimate can be seen as a positive development, particularly in light of the upcoming refunding announcement.
Innes suggests that this news should provide some relief to stock and forex markets, as it may result in less significant increases in yields.
