U.S. bond markets are experiencing sharp fluctuations amid economic uncertainty and ambiguity in U.S. monetary and fiscal policy. Yields on U.S. Treasury bonds have significantly declined across various maturities. As of Monday, September 16, 2024, the two-year bond yield was 3.528%, its lowest level in two years, specifically since September 13, 2022. The ten-year bond yield recorded 3.599% yesterday, its lowest level since June 1, 2023. Notably, the yield curve between two-year and ten-year bonds has flattened, with the current positive spread of approximately 5 basis points, after having been inverted for a long time. This raises questions about whether the U.S. economy will experience a recession or a smooth landing in the near future.
The two-year bond yield is highly sensitive to Federal Reserve monetary policy, and several factors have contributed to downward momentum for this short-term yield, including:
- Increased market bets on U.S. interest rate cuts, with expectations currently pricing in three rate reductions this year.
- Dovish statements from Federal Reserve Chairman Jerome Powell and Fed members, who hinted that interest rate cuts would begin this year.
- A decline in some U.S. economic indicators, such as the annual Consumer Price Index (CPI) which recorded 2.5%, in line with expectations but below the previous reading of 2.9%. Additionally, the annual Producer Price Index (PPI) slowed to 1.7%, lower than expectations (1.8%) and the previous reading (2.1%).
Analysts are awaiting today’s Federal Reserve decision on interest rates, with expectations of a 25 basis point cut with a 36% probability and a 50 basis point cut with a 64% probability. Attention will be focused on Chairman Jerome Powell’s speech and the tone regarding the path, pace, and magnitude of future rate changes.
From a technical perspective, the momentum for the two-year bond yield appears negative, according to the Relative Strength Index (RSI), which currently stands at around 31 points. The Moving Average Convergence Divergence (MACD) indicator, in blue, is below the Signal Line, in orange, in the negative territory, which suggests a bearish momentum for the two-year bond yield.
Please note that this analysis is provided for informational purposes only and should not be considered as investment advice. All trading involves risk.
