The yield on the 10-year US Treasury fell to below 4.2% on Thursday, approaching its lowest level since early December as investors weighed increasing risks of an economic slowdown. The decline in yields reflects growing market expectations that the Federal Reserve may need to ease monetary policy more aggressively than initially anticipated.
US 10-year yield falls below 4.2%
As expected, the Fed held interest rates unchanged, but its latest dot plot signaled that officials still project only two 25bps rate cuts this year, citing concerns over slowing growth and rising unemployment. However, traders reacted differently, pricing in three rate cuts in 2024, up from prior expectations of just two before the Fed’s decision. This shift occurred despite the central bank’s upward revisions to its inflation outlook, reinforcing uncertainty about the timing and extent of policy easing. Fed Chair Jerome Powell reassured markets that the inflationary effects of tariffs introduced by President Trump would likely be transitory, further dampening concerns over long-term price pressures.
Support from Fed
Bonds also found support from the Fed’s decision to slow the pace of its balance sheet runoff, which is intended to ease liquidity constraints in financial markets. The central bank announced it will reduce its Treasury holdings by $5 billion per month instead of the previously planned $20 billion, while keeping the $35 billion monthly runoff for mortgage-backed securities (MBS) unchanged. This move reflects the Fed’s acknowledgment of tightening financial conditions and suggests a more cautious approach to quantitative tightening moving forward.
Looking ahead, market participants will closely monitor economic data releases, including inflation figures, job market reports, and GDP growth data, for further signals on the Fed’s policy path. Any signs of a sharper economic downturn or further disinflationary pressures could reinforce expectations for more aggressive rate cuts, keeping Treasury yields under pressure in the coming months.
