Bond yields rose early Thursday as traders continued to analyze the minutes of the Federal Reserve's latest meeting and await further updates in the US labor market.
What is happening
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The yield on the two-year Treasury note BX:TMUBMUSD02Y was unchanged at 4.341%. Yields move in the opposite direction to prices.
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The yield on the 10-year Treasury note BX:TMUBMUSD10Y rose 3.3 basis points to 3.953%.
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The 30-year Treasury yield BX:TMUBMUSD30Y added 4 basis points to 4.114%.
What drives the markets?
Commentators generally viewed the minutes of the Fed's December policy meeting, published on Wednesday, as less dovish than investors had hoped, with officials giving little indication that the central bank is considering cutting interest rates at the pace the market is pricing in. .
However, benchmark 10-year bond yields settled below 4% after traders also pointed out that the latest jobs and manufacturing surveys showed a slowing economy that could help the Fed meet its 2% inflation target.
Therefore, investors are hoping that the December non-farm payrolls report, published on Friday, will match the narrative of a labor market slowing down, thus suppressing wage inflation.
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U.S. economic updates scheduled for Thursday include the December ADP private sector employment report, scheduled for release at 8:30 a.m. ET, weekly initial jobless claims at 8:30 a.m., and the final S&P services PMI for December at 9:45 am.
Before all that, markets expect a 93.3% chance that the Fed will leave benchmark interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31, according to the CME FedWatch tool.
The chances of a rate cut of at least 25 basis points at the subsequent meeting in March are 70.2%. The central bank is expected to cut the federal funds rate target to around 3.95 by December 2024, according to 30-day federal funds futures.
What analysts say
“Since the last FOMC minutes, we have seen the labor market continue to be better balanced, downward surprises on inflation, and easing of financial conditions,” said Morgan Stanley's economic team led by Ellen Zentner, chief U.S. economist. “Markets have interpreted recent FOMC comments and weak data in 4Q23 as evidence enough for the Fed to start cutting earlier and more aggressively than we expected and what the Fed's December summary of economic outlook implied.”
“The minutes of the December FOMC meeting further emphasized that they are not preparing to cut interest rates soon. While the risks to growth and inflation are now better balanced, they still care closely about inflation risks and see the risks of interest rates remaining at current levels for longer than expected. “We still expect the Fed to make its first cut in June,” Morgan Stanley added.
