As the curtains close on 2023, benchmark US 10-year Treasury yields have ended the year slightly higher compared to the previous year, driven by market reactions to weak economic data and the looming anticipation of an economic downturn in the New Year.

The final week of trading, typically subdued as traders take holiday breaks, commenced with a decline in yields on Tuesday. This followed economic data from the previous week that hinted at weakening inflation trends. On Wednesday, the two-year Treasury's yield touched its lowest point since May 17 at 4.243 per cent, while the 10-year briefly dipped to 3.820 per cent, its lowest level since July 19. Despite these declines, yields have since rebounded as data points this week indicated weakness in the US economy.

Closing at 3.879 per cent, the yield on 10-year Treasury notes registered a 2.9 basis points increase, standing 4.5 basis points higher than the same period last year. Notably, it marked a substantial 69.2 basis points decline from the end of the third quarter. In tandem, the two-year's yield, often linked to interest rate expectations, saw a dip to 4.249 per cent, reflecting an 11.8 basis points decrease from the previous year and a significant 79.7 basis points drop from the end of Q3. The 30-year Treasury bond yield increased by 4.3 basis points to 4.031 per cent.

A focal point of market attention, the US Treasury yield curve measuring the gap between two- and 10-year Treasury notes, indicated recessionary expectations with a -38.6 basis points reading. However, analysts caution against reading too much into yield movements during the last week of the year, citing reduced market activity due to the holiday season.

Market participants are factoring in potential interest rate cuts by the US Federal Reserve as early as March 2024, with traders anticipating up to 152 basis points in rate cuts by the end of the year. Strong demand observed in Treasury auctions for the two-year, five-year, and seven-year maturities this week provided a counterbalance to the upward yield move, adding a layer of complexity to the year-end market dynamics.

As the final trading day of 2023 concludes, the broader economic landscape appears poised for a recalibration, with investors closely monitoring signals from central banks and economic indicators for cues on the path ahead.

(With Reuters inputs)