2-Treasury yield ends at lowest level in over a month on prospect of no more Fed rate hikes

By Vivien Lou Chen

Treasury yields finished sharply lower on Tuesday, with the policy-sensitive 2-year rate ending at its lowest level in more than a month, as fed funds futures traders priced in a high likelihood that the Federal Reserve will not raise interest rates again.

What happened

The yield on the 2-year Treasury BX:TMUBMUSD02Y dropped 9.5 basis points to 4.982% from 5.077% on Friday. It finished at its lowest closing level since Sept. 8, based on 3 p.m. Eastern time figures from Dow Jones Market Data.The yield on the 10-year Treasury BX:TMUBMUSD10Y declined 12.9 basis points to 4.654% from 4.783% on Friday. Tuesday's level is the lowest close for the 10-year rate since Sept. 29. The yield on the 30-year Treasury BX:TMUBMUSD30Y fell 11.3 basis points to 4.828% from 4.941% on Friday. It finished at its lowest level since Oct. 2.The cash market was shut for the Columbus and Indigenous Peoples holiday on Monday.

What's driving markets

Treasury yields sank on Tuesday as traders and investors absorbed a batch of comments from Fed officials that were interpreted as being dovish.On Tuesday, Atlanta Fed President Raphael Bostic said he doesn't think there needs to be anymore rate hikes to get inflation back to 2%. And on Monday, Fed Vice Chair Philip Jefferson said the central bank could "proceed carefully" following the recent jump in Treasury yields to 16-year highs, while Dallas Fed President Lorie Logan said that such a surge may mean less need for additional rate increases by policy makers. Read: Bond traders no longer think inflation is Fed's biggest challenge, even as risks riseTuesday's retreat in yields will be put to the test in coming days, with data on producer and consumer prices for September set for release on Wednesday and Thursday.For now, fed funds futures traders are pricing in an 89.6% chance of a pause by the Fed on Nov. 1, according to the CME FedWatch Tool. They also see a 70.5% likelihood of no action by December, which would leave the Fed's main interest-rate target at a 22-year high between 5.25%-5.5%.

What analysts are saying

"Considerable uncertainty remains over several underlying forces guiding the Treasury market, including the outlook for government bond issuance, the economically neutral level of fed funds rates, and the term premium -- the rate of compensation demanded by investors for holding longer-term over shorter-term bonds. But, in our view, the recent upward momentum in yields has been spurred largely by technical factors and should be reversed," said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.

-Vivien Lou Chen

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10-10-23 1534ET

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