US 10-year yield touches lowest since mid-July

NEW YORK, Dec 27 – The benchmark US 10-year Treasury’s yield on Wednesday hit its lowest point since mid-July, as investors expect a mild recession and Federal Reserve interest rate cuts in the New Year.

The yield on 10-year Treasury notes was down 9 basis points at 3.796%. It briefly touched 3.820% earlier in the day, its lowest since July 19.

Meanwhile, the two-year US Treasury yield hit its lowest point since May 17 at 4.243%. The two-year’s yield typically moves in step with interest rate expectations

The 30-year Treasury bond’s yield, meanwhile, was down 8.2 basis points at 3.961%.

The decline in yields to cap 2023 comes as investors anticipate a mild economic recession in the US heading into 2024. Treasuries’ yields rise as their prices fall.

“Movement within the rates market during this transition will be choppy,” said Sean Simko, managing director and head of fixed income portfolio management at SEI Investments.

“Global risks of a slowdown in growth are likely to materialize as central banks have steadily increased policy rates to current levels.”

Most traders have penciled in at least three rate cuts from the Fed in 2024. The central bank signaled as much at its December meeting, pointing to gradually easing inflation.

Markets expect rates to remain unchanged at the central bank’s next meeting in January, but have priced in high odds that it will begin cutting in March.

But many traders are typically away from their desks in the last week of the year, during which yield movements should be taken with a grain of salt, Simko said.

“Any movement within the rates market may not be viewed as a true indication of what may come in 2024,” he said.

But much of the timing and extent of rate cuts will depend on economic data, including the strength of labor markets, according to Gennadiy Goldberg, head of US rates strategy at TD Securities.

“If you see the data hold up better than anticipated – if for example, the next payroll number and next inflation print come in a little bit higher – you could still see room for a reshuffling of expectations,” he said.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was last at -44.3 basis points.

“As much as the Fed is trying to signal that they want to engineer a soft landing, we’ll see if the data cooperates,” Goldberg said.

The next significant economic data comes on Thursday, including the latest initial jobless claims.

The US Treasury Department on Wednesday auctioned USD 58 billion in five-year notes, seeing nearly three times that amount in demand. The five-year’s yield was last down 7.3 bps at 3.802%.

December 27 Wednesday 1:41 PM New York / 1841 GMT

(Reporting by Matt Tracy; Editing by Kirsten Donovan and Barbara Lewis)