As the week came to a close, the US Treasury market witnessed a fluctuation in response to inflation data that fell below expectations. This unexpected turn of events led traders to reassess their forecasts for Federal Reserve interest-rate adjustments in the upcoming year. Amidst these developments, the Treasury yields experienced notable movements, indicating a shift in market sentiment.
Key points from this event include:
- The two-year Treasury yield showed a marginal decrease to 4.31% towards the end of the trading day, following an initial drop to 4.25%.
- The benchmark 10-year rate saw a decline of 4 basis points to 4.51% by late trade, marking a significant adjustment.
- A wave of anticipation had swept through the market earlier in the week, resulting in a notable steepening trend in the yield curve, which had not been witnessed since 2022.
Despite these fluctuations, Treasuries managed to maintain their gains as the University of Michigan survey revealed a positive uptick in US consumer sentiment for the fifth consecutive month. Furthermore, the November data on the core personal consumption expenditures price index indicated a modest inflation increase, falling slightly below consensus forecasts.
Looking ahead, the market sentiment is divided, with swaps traders pricing in approximately 39 basis points of total Fed cuts next year. However, industry experts remain divided on the extent of these adjustments, with some anticipating a more aggressive approach from the central bank. Subadra Rajappa, head of US rates strategy at Societe Generale, foresees the possibility of four quarter-point Fed cuts next year, citing economic indicators pointing towards a moderation in growth, employment, and inflation.
The recent pressure on long-dated debt, driven by concerns over President-elect Donald Trump’s fiscal policies, has further fueled uncertainty among investors. This, coupled with a volatile trading week, has led to some position unwinding, potentially triggering a reversal of the steepening trade. Despite these fluctuations, Michael Hunstad, deputy chief investment officer at Northern Trust Asset Management, remains steadfast in his belief of a continued trend of steepening in the yield curve.
In conclusion, the Treasury market remains on edge as investors navigate through uncertain economic indicators and shifting market sentiment. The coming year is poised to bring further adjustments to interest rates, with differing opinions on the extent of these changes. As we move forward, it is crucial for investors to stay vigilant and adaptable in response to the evolving market conditions.
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