US Treasury yields fall amid hopes of Fed rate cut in 2024

US Treasury yields edged lower on Wednesday as investors anticipate potential interest rate cuts by the Federal Reserve in the upcoming year. The yield on 10-year Treasury notes experienced a decrease of 4.5 basis points, settling at 3.841 per cent, while the yield on the 30-year Treasury bond declined by 5.8 basis points to 3.985 per cent.

This decline in yields as the year concludes is reflective of the prevailing market sentiment, with many traders factoring in at least three rate cuts from the Federal Reserve in 2024. The central bank signaled this expectation during its December meeting, citing a gradual easing of inflation as a key factor.

Market expectations suggest that interest rates will likely remain unchanged at the Federal Reserve's next meeting in January. However, there is a high likelihood, as per market pricing, that rate cuts could commence in March.

The timing and extent of these potential rate cuts hinge on economic data, particularly the strength of labor markets, according to Gennadiy Goldberg, the head of US rates strategy at TD Securities. He noted that if economic data, such as the next payroll report and inflation figures, surpass expectations, there may be room for a reassessment of rate cut expectations.

Despite the market pricing in rate cuts, there is a prevailing expectation among many participants of a mild recession heading into 2024. The closely watched segment of the US Treasury yield curve, measuring the gap between yields on two- and 10-year Treasury notes—a significant indicator of economic expectations—was last recorded at -44.4 basis points.

The two-year US Treasury yield, often aligned with interest rate expectations, decreased by 0.6 basis points to 4.283 per cent. Analysts are closely monitoring economic data to gauge the trajectory of future rate adjustments.

Gennadiy Goldberg emphasized that while the Federal Reserve aims to engineer a soft landing, the cooperation of economic data will play a crucial role in determining the outcome. The next significant economic data is expected on Thursday, including the release of the latest initial jobless claims.

Simultaneously, the US Treasury Department is scheduled to conduct an auction of $58 billion in five-year notes on Wednesday, adding another layer of market activity in the ongoing economic landscape.

(With Reuters inputs.)