U.S. bond yields fell on Tuesday after the Bank of Japan maintained its negative interest rate policy and gave little indication it was minded to shift its ultra-loose stance anytime soon.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
slipped 2.6 basis points to 4.442%. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 2.8 basis points to 3.911%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
dipped by 3 basis points to 4.018%.
What’s driving markets
The 10-year Treasury yield was trading near its lowest level since July as traders parsed a few competing bond market drivers.
Helping suppress yields was a lingering hope that easing U.S. inflation of late means the Federal Reserve can start cutting interest rates next year — though Fed officials in recent days have spoken to try and calm the market’s enthusiasm for this narrative.
Also weighing on yields was Tuesday’s news that the Bank of Japan will continue to keep interest rates at minus 0.1%, with Governor Kazuo Ueda offering little evidence during his press conference that a move to exit the central bank’s ultra-loose stance was coming soon.
Benchmark Japanese government bond yields
BX:TMBMKJP-10Y
fell in response, making their U.S. peers relatively more attractive.
However, potentially counteracting the downward move in global bond yields are concerns that tensions in the middle East may build inflationary pressures. Shipping costs may rise as maritime transport groups say they have halted transits through the Red Sea because of the attacks on boats by Yemen’s Houthi militia. And worries about oil supplies from the region may also force up energy prices.
Still, for now the bets on Fed rate cuts in several months have been pared back only slightly.
Markets are pricing in a 92% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut at the subsequent meeting in March is priced at 72.5%, up from just 28% a month ago.
U.S. economic updates set for release on Tuesday include November housing starts and building permits at 8:30 a.m. Eastern. Atlanta Fed President Raphael Bostic is due to speak at 12:30 p.m.
What are analysts saying
“While broadly the Fed is optimistic inflation will recede in an orderly and timely manner, price pressures have made more than a few head fakes with risks still remaining to the upside,” said Lindsey Piegza, chief economist at Stifel.
“Thus, while the Fed may be adding in the possibility of rate cuts to the broader discussion, it appears there are at least some cooler heads prevailing, focusing on the mission at hand of first achieving 2% inflation before backing a decision to lessen policy restrictions,” Piegza added.
This story originally appeared on Marketwatch
