The yield on the 10-year US Treasury note fell to 4.2% on Friday, approaching the lowest in over two weeks as markets continued to assess risks of an economic slowdown and how the Federal Reserve would react to these developing challenges.
US 10-tear yield falls to 4.2%
Investors have become increasingly cautious, reflecting growing concerns about weakening economic indicators, including slowing growth and rising unemployment. The Fed held its rates unchanged this week, signaling a more cautious approach, but its dot-plot indicated that policymakers still foresee two 25bps rate cuts this year. This outlook was shaped by their concerns over lower growth and higher unemployment, signaling that the central bank may act to support the economy if conditions worsen.
Traders adjust their expectations
As a result, traders began to adjust their expectations, now pricing in three rate cuts by the Fed this year, up from prior expectations of just two cuts before the decision. This shift came despite the Fed's projections for higher inflation in the near term, as concerns over tariffs and rising prices remain. Chairman Powell emphasized that the inflationary impact of tariffs is expected to be temporary, providing some reassurance to markets that the Fed might not need to tighten policy further in the face of mounting risks.
Support from the Fed
Bonds also found support from the Fed’s decision to slow its balance sheet runoff, a move aimed at addressing signs of lower underlying liquidity in financial markets. The Fed will now reduce its Treasury holdings by $5 billion per month instead of the previously planned $20 billion, a shift that underscores the central bank’s growing sensitivity to the state of the economy and financial conditions. Meanwhile, the $35 billion monthly runoff for mortgage-backed securities (MBSs) will remain unchanged, signaling that the Fed is attempting to strike a balance between easing financial market pressures while still keeping inflationary concerns in check. This combination of rate cut expectations and a more cautious approach to the Fed’s balance sheet has had a marked impact on bond yields, pushing them lower as investors adjust to a potentially slower economic path ahead.
