Yields jump in new year sell-off as rate cut hopes moderate

NEW YORK, Jan 2 – US Treasury yields popped to two-week highs Tuesday on the first trading day of the new year as traders lowered expectations for rate cuts in 2024.

Markets are pricing in that the Federal Reserve will cut benchmark rates beginning in March by a total of 150 basis points this year, down from expectations of more than 160 basis points in cuts seen last week.

The jump in yields, which move in the opposite direction to prices, was expected given the outsized rally in Treasuries over November and December in response to signs that inflation was cooling more than expected and the Federal Reserve was closer to cutting rates, said David Albrycht, chief investment officer at Newfleet Asset Management.

“Things may have gotten a little ahead of themselves, whether it’s equity valuations or expectations of Treasury rate cuts,” he said. “People have become really complacent that the Fed is going to execute a soft landing but it’s still not clear.”

The yield on 10-year Treasury notes was up 8.3 basis points at 3.943%, roughly 15 basis points above its six-month low hit in December. The yield on the 30-year Treasury bond was up 6.5 basis points at 4.083%.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 8.5 basis points at 4.335%.

Investors will monitor economic figures this week, including jobs data on Friday that may influence whether the Fed begins to cut rates in March as markets expect. The minutes from the central bank’s December policy meeting will be released Wednesday.

The New York Fed said on Tuesday that it had accepted USD 704.9 billion submitted to its overnight reverse repo facility on Jan. 2, well below the USD 1.018 trillion it accepted on the final trading day of 2023. The Fed’s reverse repo facility exists to put a floor underneath short-term interest rates and has been shrinking as the Fed continues to draw down liquidity.

Futures markets see a nearly 70% chance of a 25 basis point rate cut at the March 20 meeting, up from a 55% chance seen a month ago, according to CME’s FedWatch Tool.

Markets will likely focus on the upcoming labor market data to gauge the next move in Treasuries, said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

“We’re skeptical that anything on the near-term macro horizon will materially alter the underlying tone favoring higher yields,” he said.

January 2 Tuesday 3:31 PM New York / 2031 GMT

(Reporting by David Randall; Editing by Tomasz Janowski and Lisa Shumaker)