10-year Treasury yield ends with biggest weekly decline in a year, following Fed’s dovish pivot

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  rose 5.8 basis points to 4.455% from 4.397% on Thursday. The rate still ended the week lower by 27 basis points and is now down two of the past three weeks.
• The yield on the 10-year Treasury
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  was marginally lower at 3.927% versus 3.929% on Thursday. It fell 31.7 basis points this week, the largest one-week decline since November 2022.
• The yield on the 30-year Treasury
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  fell 2.7 basis points to 4.026% from roughly 4.053% on Thursday. For the week, it fell 29.9 basis points, the largest weekly decline since the period that ended on March 6, 2020.

What drove markets

On Friday, a pair of Fed officials pushed back on the possibility of rate cuts beginning early next year, even as fed-funds futures traders clung to a 69.4% chance of at least a quarter-point reduction by next March.

In an interview with CNBC, New York Fed President John Williams said it is too early to discuss whether it’s time to cut borrowing costs and that “we aren’t really talking about cutting interest rates right now.” Meanwhile, Atlanta Fed President Raphael Bostic told Reuters that he thinks the central bank can begin to lower rates in the third quarter of 2024.

Read: History shows even the Fed can’t really predict what it does with interest rates a year out

Markets priced in an 87.6% probability that the Fed will leave its benchmark interest rate unchanged again at 5.25 to 5.5% in January, according to the CME FedWatch Tool. Fed-funds futures traders mostly expect policy makers to cut rates five to seven times, in quarter-point increments, by next December.

In U.S. data released on Friday, the New York Fed’s Empire State manufacturing survey for December sank to minus 14.5 and hit a four-month low, exacerbating worries about that sector. And industrial production rebounded in November following the end of a major auto-workers strike.

See also: U.S. economy posts steady but lackluster growth at year’s end, S&P finds

What strategists are saying

“In the year ahead, investors across financial markets will be focused on timing the Fed’s first rate cut as [Fed Chair Jerome] Powell begins the process of gradually returning policy rates to neutral,” BMO Capital Markets rate strategists Ian Lyngen and Ben Jeffery said.

“We expect that when the Fed eventually reduces the target range, it will occur later than investors anticipate, and the first cut will be of the ‘fine-tuning’ quarter-point variety,” they wrote in a note.