by Gertrude Chavez-Dreyfus
Nuevanew yorkDec. 7 – US Treasury yields fell for a second straight session on Wednesday in another volatile day, with little market indication this week that fixed income investors are uncertain about the path of Federal Reserve money policy.
* Many market players believe yields may have peaked and inflation has eased, so they anticipate the Federal Reserve will slow its rate-cutting pace at this month’s meeting.
* On the other hand, strong employment data for November and mostly positive reports on the manufacturing and services sectors suggest the Federal Reserve may still have some way to go when it comes to controlling inflation and the labor market.
* Fed Chairman Jerome Powell said late last month that the US central bank could reduce the pace of interest rate hikes “by December at the earliest” but warned that fighting inflation may be somewhat exhausting has gone.
* This has prompted the market to anticipate a lower terminal rate. Fed funds futures showed the top rate on Wednesday at 4.93%, down from last week’s expectation of 5.1% before Powell spoke.
* US Treasury yields have edged lower since Powell’s remarks on Nov. 30. The yield on the benchmark 10-year debt has gained 32 basis points (bp).
* The US two-year yield, which typically reflects interest rate expectations, has since fallen about 26 basis points.
* The portion of the yield curve that measures the difference between 2-year and 10-year bond returns inverted at -82.5 basis points. The curve had widened to -84.9 basis points on Tuesday, the highest in two weeks. An inversion of this curve usually precedes a recession.
* By midmorning, the yield on the 10-year note was down 5.6 basis points to 3.457%, while the 30-year note fell 6.1 basis points to 3.462%.
* At the short end of the curve, the yield on the two-year US Treasury fell 7.7 basis points to 4.283%.