Treasury yields fell for the first time in three sessions on Monday after a December New York Fed survey showed consumer expectations for inflation declining across all time horizons.
What happened
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell 4.6 basis points to 4.343% from 4.389% on Friday. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
dropped 4 basis points to 4.001% from 4.041% late Friday. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
dipped 2.7 basis points to 4.172% from 4.199% Friday afternoon.
What drove markets
In data released on Monday, the New York Fed’s survey of consumer expectations revealed that Americans felt more confident about the likelihood that price gains will ease over the short, medium, and long term.
Read: It’s been years since consumers felt this good about where inflation could go next
In particular, median inflation expectations for the year ahead fell to 3%, or the lowest level since January 2021, from 3.4% previously. Meanwhile, median inflation expectations dropped to 2.6% from 3% at the three-year ahead horizon, and to 2.5% from 2.7% for the five-year ahead period.
The next major U.S. inflation update is the December consumer-price index report, which will be published on Thursday. Economists expect annual headline inflation to be 3.3%, up from November’s 3.1%, but core inflation — which strips out volatile items like food and energy — to ease to 3.8% from 4% previously.
As of Monday, the market priced in a 60.9% chance that the central bank will trim borrowing costs by 25 basis points by its March meeting. In addition, fed funds futures traders priced in a more than 50% likelihood of at least six quarter-point rate cuts by year-end.
On Saturday, Dallas Fed President Lorie Logan said it is too early to take rate increases off the table with inflation remaining above the 2% target, and that “a premature easing of financial conditions could allow demand to pick back up.”
See also: Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024
What analysts are saying
“Our base case scenario is for a soft landing, in which growth slows to just below trend, a US recession is avoided, inflation falls toward central bank targets by the second half of the year, and the Fed cuts interest rates by 100 basis points,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.
“We think growth headwinds in the U.S. are unlikely to lead to higher precautionary savings, and that inflation should fall at a more gradual pace,” Marcelli wrote in an email. “Though markets are now pricing steeper rate cuts than our forecast, we think the Fed is trying to balance its desire to help the economy avoid recession with labor market and core inflation data that still suggest a need for somewhat restrictive monetary policy.”
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