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US Rates Decline As The Market Consolidates, Matching Those Of The UK And Canada

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Student Loan Forgiveness; Source- CNN

After last week’s advances on the long end of the curve due to stronger-than-expected inflation statistics, investors consolidated positions on Tuesday, the first day of a holiday-shortened week.

Inflation Fell Than Anticipated

A day with no economic data out of the US, analysts indicated that the drop in UK and Canadian yields also had an impact on their US equivalent. The Federal Open Market Committee meeting minutes from Wednesday are expected to provide additional insights into the forecast for U.S. interest rates by investors.

The yields on the UK’s two-year and 10-year gilts dropped to 4.551% and 4.01%, respectively, following remarks made by Bank of England Governor Andrew Bailey on Tuesday indicating that he was confident in investors positioning themselves for rate cuts this year.

As core price measures relaxed and Canada’s annual inflation rate fell far more than anticipated to 2.9% in January, betting on an early rate cut increased. This also caused Canadian rates to decline, dropping to 3.5%.

LSEG’s rate probability tool indicates that the U.S. rate futures market has priced in an 80% possibility of a rate drop at the Federal Reserve’s June policy meeting, which would be the first cut since the COVID-19 epidemic. Rate futures were speculating on a March easing two weeks ago.

US Economy Affected

Canada

(PHOTO: WBAL)

Futures traders are pricing in three rate reductions of at least 25 basis points (bps) in 2024, which would bring the federal funds rate down to 4.4% by the end of the year. Traders factored in at least five layoffs two weeks ago.

In the meantime, the U.S. yield curve steepened on Tuesday, with the widely followed difference in yields between the 10-year and two-year U.S. Treasury notes now at minus 33.5 basis points, up from minus 36.7 basis points late on Friday.

A portion of the curve’s steepness was ascribed by some analysts to the Conference Board’s Leading Economic Index, which was made public on Tuesday. A steeper curve indicates that rates have peaked and a decrease by the Fed is likely next.

The indicator, which is intended to serve as a predictor of future economic activity, dropped 0.4% in January to 102.7, the lowest level since April 2020, during the pandemic that affected the US economy.

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