Interest Rate Expectations Shift as Treasury Yields Rise
A significant shift in interest rate expectations is underway, with the 10-Year Treasury yield reaching its highest level in nearly three months. On Wednesday, the yield rose 11 basis points to 4.19%, marking its largest intraday increase since October 4.
Reassessing the Fed’s Next Move
The rise in Treasury yields can be attributed to a recalibration of interest rate expectations following the Federal Reserve’s decision to cut interest rates for the first time in over four years last month. The Fed’s move was seen as a significant event, but opinions on the size of the cut were divided. Fed Governor Michelle Bowman dissented from the decision, advocating for a smaller cut.
Economic Data Supports Cautious Approach
In recent weeks, economic data has generally provided positive surprises, supporting Bowman’s view that the Fed can take a slow and steady approach to returning the federal funds rate to a neutral level. This data has also contributed to the stock market’s record-breaking run.
Wall Street Adjusts Rate Cut Expectations
As a result of the shifting interest rate landscape, Wall Street has dramatically curbed its expectations for upcoming rate cuts. According to federal funds futures trading data, there is now a 64% chance that the Fed will cut rates by a total of 50 basis points over its next two meetings. Notably, markets see no chance of bigger cuts, marking a significant reversal from just a month ago.
A New Trajectory for Interest Rates?
The recent rise in Treasury yields suggests that interest rates may be on a new trajectory. As markets continue to assess the likelihood of a soft landing for the U.S. economy, one thing is clear: the interest rate landscape is evolving, and investors must adapt to these changes.
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