US Treasury yields fell slightly, while market participants continue to overestimate the prospects for monetary policy after yesterday's statements by the head of the Federal Reserve and weaker-than-expected labor market data.
The yield on 5-year Treasury bonds fell by 0.4 basis points, reaching 4.115%, while the yield on 30-year bonds was 4.236% (-0.3 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 0.4 basis points to 4.558%, while the yield on 10-year bonds fell to 4.101% (-0.3 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 46 basis points.
Yesterday, Fed Chairman Powell said that it would probably be advisable to begin easing monetary policy later this year, but stressed that this would not happen until the Fed gained greater confidence that inflation was steadily approaching to 2%. Overall, the Fed Chairman's statements coincided with market expectations and did not provoke a significant revision of expectations for interest rate cuts this year. His statements also broadly echoed the sentiment conveyed by Fed officials in recent weeks, who have given few indications about a potential timeline for rate cuts and indicated their decision-making would be data-dependent. Markets still believe that the Fed is likely to start cutting rates at the end of the second quarter. According to the CME FedWatch Tool, markets see a 20.5% probability of a 25 basis point rate cut at the Fed meeting in May, and a 68.2% probability of a rate cut in June.
Today Powell will testify before the Senate Banking Committee and he will likely repeat yesterday's statements. Investors will also focus on trade balance and labor market data. According to forecasts, in January the trade deficit rose to $63.4 billion from $62.2 billion in December, and initial jobless claims remained at 215 thousand last week.