Treasury yields drop after Federal Reserve’s first interest-rate update of 2024

U.S. government-debt yields finished at their lowest levels in at least two weeks on Wednesday, even after Federal Reserve officials signaled that they need more time before they are confident about cutting interest rates.

What happened

  • The yield on the 2-year Treasury
    BX:TMUBMUSD02Y
    fell 13 basis points to 4.227%, from 4.357% on Tuesday. Wednesday’s level is the lowest since Jan. 16, based on 3 p.m. Eastern time figures from Dow Jones Market Data.

  • The yield on the 10-year Treasury
    BX:TMUBMUSD10Y
    dropped 9.1 basis points to 3.965%, from 4.056% on Tuesday.

  • The yield on the 30-year Treasury
    BX:TMUBMUSD30Y
    declined 6.1 basis points to 4.216%, from 4.277% on Tuesday.

  • Wednesday’s levels are the lowest for the 10- and 30-year yields since Jan. 12.

What drove markets

As widely expected, Fed policymakers on Wednesday left their main interest-rate target unchanged at between 5.25%-5%. However, the policy-setting Federal Open Market Committee said it does “not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

Fed Chairman Jerome Powell, appearing at a press conference, focused on the continued risks to inflation and said policymakers didn’t actively consider cutting rates during this week’s two-day meeting. He also seemed to take the likelihood of a March rate cut off the table, saying he doesn’t expect officials to have enough confidence to make such a move by that time.

Fed-funds futures traders now see a 64.4% probability that officials will keep their benchmark interest-rate target unchanged at between 5.25% and 5.5% by March, according to the CME FedWatch Tool. The chance of a 25-basis-point rate cut by March was seen at 34.5%.

Data released earlier on Wednesday from overseas showed that China’s manufacturing activity contracted for a fourth consecutive month in January — kicking off the day’s initial round of Treasury buying.

That buying picked up momentum in the wake of new U.S. economic data. The ADP private-sector employment report showed American businesses created a lower-than-expected 107,000 new jobs in January. In addition, the costs that companies pay to employ workers rose 0.9% in the fourth quarter, the smallest increase in two-and-a-half years.

Separately on Wednesday, the Treasury Department said it would sell $121 billion in notes and bonds next week.

What investors are saying

“Wednesday’s Federal Reserve statement showed no surprises, with the central bank keeping interest rates unchanged,” said Clark Bellin, president and chief investment officer of Bellwether Wealth in Lincoln, Neb. “The main question for investors is just how long will it take for inflation to move back to the Fed’s 2% target. We believe the Fed will refrain from cutting interest rates until inflation reaches 2%. Inflation is close to the Fed’s target but not quite there yet, and the Fed wants to be sure that inflation has truly been eliminated.”

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