The outlook for the Federal Reserve's interest rate cuts is clouded as the 10-year U.S. Treasury yield breaks above 4.5%
The yield on the 10-year U.S. Treasury rose to 4.52%, raising concerns in the market about the Federal Reserve's interest rate cut prospects. Federal Reserve officials indicated that they would maintain the policy interest rate unchanged, as inflation risks have resurfaced and the economic growth outlook remains strong. The money market expects the Federal Reserve to cut rates by 25 basis points in 2025, with a roughly 50% chance of a rate cut within the year. Meanwhile, European bonds fell sharply, with the yield spread between German and Italian bonds narrowing to its lowest level since 2021
According to Zhitong Finance APP, as the U.S. market reopened after the holiday on Monday, the yield on the 10-year U.S. Treasury bond rose by 4 basis points to 4.52%, climbing from a weekly low closing level, and the yield curve steepened again. European benchmark yields also rose for the second consecutive day as investors worried that increased defense spending in the region would require additional bond issuance.
In the previous days, U.S. bond investors experienced a rocky period. They were first hit by consumer price data that exceeded expectations, followed by a producer price report that eased inflation concerns. However, Federal Reserve Governor Christopher Waller stated on Monday that he prefers to keep the policy rate unchanged until inflationary pressures subside, a view also held by Philadelphia Fed President Patrick Harker.
The 10-year U.S. Treasury yield rebounded from a weekly low.
Benoit Anne, Managing Director at MFS Investment Management, stated: "The macroeconomic backdrop indicates that U.S. Treasury yields face upside risks. In particular, the market is pricing in Federal Reserve policy too aggressively, inflation risks are resurfacing, and the economic growth outlook remains strong. In other words, macro drivers that help lower rates have become scarce."
San Francisco Fed President Mary Daly and Federal Reserve Vice Chair for Supervision Michael Barr will speak on Tuesday Eastern Time, and the minutes from the Fed's most recent policy meeting will be released on Wednesday Eastern Time.
The money market currently expects the Federal Reserve to cut rates by 25 basis points in 2025, with the likelihood of a second rate cut this year at about 50%.
Elias Haddad, Senior Strategist at Brown Brothers Harriman, stated: "As Federal Reserve officials continue to suggest they are not in a hurry to restore easing policies, U.S. Treasury yields are rising overall."
Meanwhile, on Monday, European bonds fell sharply, with the spread between German and Italian bonds narrowing to its lowest level since 2021.
U.S. and Russian officials met in Saudi Arabia to discuss how to end the war in Ukraine, while Europe is eager to formulate a plan to fund its own defense.
Mohit Kumar, Chief Strategist at Jefferies International, stated: "It is clear that Europe will need to increase fiscal spending on defense and reconstruction. We believe that German bonds will further decline relative to U.S. Treasuries and swap trades."