U.S. Treasury yields fell on Wednesday as investors awaited the release of the first estimate of the country’s GDP for the fourth quarter of 2023 and the Federal Reserve meeting the following week, which might provide insight into when policymakers will start the highly anticipated interest rate reduction.
Collapsing Stock Market
The biggest story of the day was China’s decision to lower bank reserve requirements and pump roughly $140 billion of cash into the banking system to support a collapsing stock market and fragile economy. However, this action had minimal effect on bond markets.
News that U.S. business activity increased in January and inflation seemed to moderate caused yields to shorten their decrease, indicating that the economy started 2024 strongly.
“We seem to be in a holding pattern right now, primarily awaiting tomorrow’s GDP reports,” stated Ben Jeffrey, the rates strategist at BMO Capital Markets in New York. “I don’t really think there’s anything fundamental moving the market today.”
Auction Size Increases
The Treasury Department concludes its two-day meeting on Wednesday, the same day that it reveals details of any auction size increases. The overall financing estimate is released on Monday. The January jobless data from the Labor Department will be released on Friday of next week.
Head of Wisdom Trees fixed income strategy Kevin Flanagan expressed concerns that the Fed next week will set the stage for a rate decrease in March, as the market had been expecting before officials backed off from that possibility.
The benchmark 10-year Treasury yield dropped 1.4 basis points to 4.128%, while the two-year Treasury yield, which gauges interest rate expectations, dropped 0.7 basis points to 4.341%.
The yield curve continued to flatten, with the spread between the rates on the two- and 10-year notes now at -21.8 basis points. Since July 2022, the yield on the shorter-dated security has exceeded the yield on the longer-dated security, indicating an impending recession, as has historically been the case.