NEW YORK — Treasury yields edged higher on Friday as some investors
questioned the market’s take that the Federal Reserve will be forced to cut interest rates later
this year a day after data showed a significant decline in December consumer prices.
A 0.1% dip in headline CPI, the first decline since May 2020, led Treasuries to rally and
pushed the yield on benchmark 10-year notes down to a month low of 3.424% on
Thursday. Yields move inversely to their price.
Adding to the narrative of slowing inflation, the University of Michigan Surveys of
Consumers on Friday showed the one-year inflation outlook slipped to a preliminary reading of
4.0% in January from 4.4% last month.
The 10-year’s yield rose 5.5 basis points to 3.502% on Friday after sliding to 3.418% in
early trade, in a sign some in the market doubt Fed officials will continue to insist rates will
stay higher for longer.
A major turning point for the market that would sharply improve risk appetite is when the
Fed stops raising policy rates, said Benoit Anne, lead strategist for the investment solutions
group at MFS Investment Management in London.
However, the market is pricing extremely aggressive rate cuts when in fact rates will stay
high for some time, he said.
“We have a couple of hikes still in the pipeline and I see a sustained period where the Fed
will stay put,” Anne said.
Johan Grahn, head of ETF Strategy at AllianzIM in Minneapolis, agreed.
“The market is still not listening to what is coming from the Fed. The market is pricing
in rate cuts already some time later this year, and that is not at all what the Fed is trying to
get the market to see,” Grahn said.
The market sees a 91.6% probability the Fed hikes rates by 25 basis points when it
concludes a two-day policy meeting on Feb. 1.
Also, futures prices for the Fed’s target range for rates has fallen to 4.925% in June and
4.469% in December, indicating the market believes the Fed will cut rates later this year.
Fed policymakers have indicated the U.S. central bank’s target rate will stay above 5% into
However, Tom di Galoma, co-head of global rates trading at BTIG in New York, said Thursday’s
CPI data reduced the likelihood of more Fed rate hikes.
“I find it hard to believe that two weeks ago Fed governors were talking about a 5.5%-6% fed
funds rate,” di Galoma said, adding they will find it hard to retain that outlook.
Data showing slowing inflation and the Fed’s stance on keeping rates “higher for longer”
poses a dilemma for the market, he said.
“This tightening process is coming to an end in my view,” di Galoma said. “We might be
seeing the last Fed rate hike on Feb. 1. That’s a very real possibility.”
The two-year U.S. Treasury yield, which typically moves in step with interest
rate expectations, rose 9 basis points at 4.228%.
News that JPMorgan Chase & Co JPM.N said it set aside $1.4 billion in anticipation of a mild
recession rattled markets, with a recession harbinger – the gap between two- and 10-year yields
– widening to -73.0 basis points.
The yield on the 30-year Treasury bond rose 4.1 basis points to 3.615%.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS)
was 2.241% and the 10-year TIPS breakeven rate was 2.183%, indicating
the market sees inflation averaging 2.2% a year for the next decade.
Jan. 13 Friday 4:00 p.m. New York / 2100 GMT
Price Current Net
Yield % Change
Three-month bills 4.5075 4.6199 0.011
Six-month bills 4.6225 4.7957 -0.002
Two-year note 100-9/256 4.23 0.092
Three-year note 99-242/256 3.8945 0.083
Five-year note 101-56/256 3.6038 0.060
Seven-year note 101-248/25 3.5527 0.055
10-year note 105-32/256 3.5035 0.056
20-year bond 102-248/25 3.7854 0.044
30-year bond 106-248/25 3.616 0.042
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap spread 26.75 -2.00
U.S. 3-year dollar swap spread 14.00 -1.25
U.S. 5-year dollar swap spread 3.75 0.00
U.S. 10-year dollar swap spread -3.75 -0.25
U.S. 30-year dollar swap spread -38.75 1.25
(Reporting by Herbert Lash; Editing by Conor Humphries and Deepa Babington)