Bond yields experienced a sharp decline at the start of the week as the Treasury market reopened following an extended weekend. Traders are adjusting their expectations in light of signs suggesting that the Federal Reserve may not raise rates again in this cycle.

Key Developments

  • The yield on the 2-year Treasury fell by 8.4 basis points to 4.995%.
  • The yield on the 10-year Treasury retreated 14.1 basis points to 4.663%.
  • The yield on the 30-year Treasury dropped 12.6 basis points to 4.848%.

Market Drivers

After a long weekend, Treasury trading resumed with some catching up to do. The cash market was closed on Monday for the Columbus and Indigenous Peoples holiday. However, Treasury futures rose 0.5% on Monday as investors reacted to the war between Israel and Hamas, as well as more cautious comments from Fed officials.

Fed Vice Chair Philip Jefferson stated that the central bank could proceed with caution given the recent surge in Treasury yields. Dallas Fed President Lorie Logan also suggested that the rise in long-term rates might lower the need for further increases in borrowing costs.

Although Treasury futures are down 0.2% on Tuesday, benchmark yields in the reopened cash market are significantly lower than Friday's close.

Looking ahead, the retreat in yields will face a test with the release of producer and consumer prices data on Wednesday and Thursday respectively.

In the meantime, markets are presently pricing in an 86% probability that the Fed will maintain interest rates at their current range of 5.25% to 5.50% following its upcoming meeting on November 1, according to the CME FedWatch tool.

The likelihood of a 25 basis point rate hike to a range of 5.50% to 5.75% at the subsequent December meeting is currently priced at 25%, down from 40% a week ago.

Fed Funds Rate and Economic Updates

According to 30-day Fed Funds futures, the central bank is not expected to take its Fed funds rate target back down to around 5% until August 2024.

Economic Updates

U.S. economic updates set for release on Tuesday include the following:

  1. August Wholesale Inventories - Due at 10 a.m. Eastern.

Consumer Expectations Survey

The New York Fed will publish its survey of consumer expectations, including views on inflation, at 11 a.m. Additionally, there are a number of Fed officials making official appearances and speeches on Tuesday.

Fed Officials Appearances

Several Fed officials will be making appearances on Tuesday:

  1. Raphael Bostic, President of the Atlanta Fed - Takes part in a moderated conversation starting at 9:30 a.m.
  2. Christopher Waller, Fed Gov. - Speaks at George Mason University at 1 p.m.
  3. Neel Kashkari, President of the Minneapolis Fed - Appears in Minot, North Dakota at 3 p.m.
  4. Mary Daly, President of the San Francisco Fed - Appears at a town hall event at 6 p.m.

Treasury Auction

The Treasury will auction $46 billion of 3-year bonds at 1 p.m.

Analysts' Views

According to Jamie Dutta, market analyst at Vantage, the online broker, "The last CPI report arrives on Thursday, before the penultimate FOMC meeting of the year at the start of next month. Crucial for policymakers will be the core month-on-month data. This has averaged 0.2% over the last three months and has offered strong encouragement to markets that the disinflation process is in full swing."

Dutta added, "But questions are being raised about whether this is the fourth 'soft patch' before another upturn in price pressures, rather than something longer lasting. Last Friday's blowout jobs report and spiking oil prices could influence the headline figures and underlying price growth in the months ahead."

He concluded, "An upside surprise in the CPI data will cause markets to readjust their bets on the chances of another rate hike this year."

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