Treasury bond yields declined markedly as market participants priced the latest Fed interest rate forecasts.
The yield on 5-year Treasury bonds fell by 4.6 basis points, reaching 4.196%, while the yield on 30-year bonds was 4.42% (-3.5 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 4.0 basis points to 4.564%, while the yield on 10-year bonds fell to 4.229% (-4.2 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 34 basis points.
Yesterday, the Fed, as expected, left policy parameters unchanged, and said it still forecasts three 0.25% rate cuts this year. However, the policymakers did not provide additional hints on when a rate cut might occur. Fed Chairman Powell said he expected interest rates to be cut as long as this was supported by economic data. Meanwhile, the Fed's “dot plot" also showed three rate cuts in 2025 – one less than expected in December. The FOMC expects three more rate cuts in 2026, and then two more in the future, until the Fed funds rate settles around 2.6%. According to the CME FedWatch Tool, markets see a 9.2% probability of a 25 basis point rate cut at the Fed meeting in May, and a 71.9% probability of a rate cut in June (compared to 59.5% a week earlier).
Today, investors will focus on labor market data, PMI indices for March and the report on existing home sales for February. Economists expect that last week initial jobless claims rose to 215 thousand from 209 thousand a week earlier, manufacturing PMI fell to 51.7 from 52.2 in February, and services PMI fell to 52.0 from 52.3. Consensus estimates also suggest that existing home sales decreased to 3.94 million from 4.0 million in January.