Bond Report: Treasury yields edge lower as tech earnings disappoint, sparking risk aversion

Bond Report: Treasury yields edge lower as tech earnings disappoint, sparking risk aversion


Treasury yields edged lower on Wednesday as worries about a slowing U.S. economy hit appetite for risk and boosted demand for government bonds.

What’s happening
  • The yield on the 2-year Treasury

    slipped by 4 basis points to 4.14%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury

    retreated basis points to 3.45%.

  • The yield on the 30-year Treasury

    fell 1 basis points to 3.61%.

What’s driving markets

A risk-off tone across markets was encouraging investors to buy government bonds on Wednesday, nudging yields lower.

Investors were focused in early trade on the stock market’s slump after poorly-received forecasts from Microsoft Corp.

hit risk appetite. While declines in U.S. equities were trimmed in afternoon trade, ongoing concerns about a potential for an economic contraction remain in focus after the software giant’s “worrisome” warning that demand for its cloud services was slowing.

Many forecasters have been cautioning about the potential for the U.S. economy to slip into a recession in 2023 after the Federal Reserve dramatically raised interest rates last year. Central bankers also continue to stress the need to keep rates high for some time to win the inflation fight.

With the next Fed decision on rates due next week, focus remains on Thursday morning’s release of fourth-quarter GDP.

Read: U.S. economy ended 2022 on solid footing, GDP to show. But a recession might loom.

Markets are pricing in a 99.8% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 4.9% by June 2023, according to 30-day Fed Funds futures.

What are analysts saying

“The market is pricing close to 200bp [basis points] of rate cuts in the U.S. between June 2023 and June 2025. Is it too much? Is it too soon?,” asked Francis Yared, fixed income strategist at Deutsche Bank.

“As long as the Fed brings inflation back to target, the answer to the first question is no. In that scenario, the Fed could cut ~350bp. The answer to the second question will depend upon the debt ceiling process. If it results in a significant fiscal tightening, the timing and pace of rate cuts may be accelerated. Otherwise, the cuts could be delayed relative to current market pricing.”

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