FILE PHOTO: A bronze seal for the Department of the Treasury is shown at the U.S. Treasury building in Washington, U.S., January 20, 2023. REUTERS/Kevin Lamarque/File Photo
NEW YORK/SINGAPORE: The benchmark 10-year U.S. Treasury yield on Thursday sank below 4% for the first time in four months, after the Federal Reserve flagged that its tightening policy is ending and rate cuts loom next year.
The 10-year yield fell roughly five basis points to bottom at 3.9840% in Asia hours on Thursday, extending its drop from the previous session.
Yields across the curve similarly edged lower, with the two-year yield, which typically reflects near-term interest rate expectations, last at 4.3722%.
It had bottomed at a six-month low of 4.3510% earlier in the session, after having slumped 25 bps on Wednesday - its biggest one-day decline since March.
The broad declines came on the back of the Fed's latest policy meeting which concluded on Wednesday, where a near-unanimous 17 of 19 Fed officials project that the policy rate will be lower by the end of 2024 than it is now.
The median projection shows the rate falling three-quarters of a percentage point from the current 5.25%-5.50% range.
Keeping rates steady as expected, Fed officials said in a statement inflation "has eased over the past year," and noted that it would watch the economy to see if "any" additional rate hikes are needed.
"While the committee retains the option of additional hikes, the message from the Fed is pretty clear: the hiking cycle is over unless there is a significant surprise, and the risks of a cut are greater than those of a hike in the next several months," said Eric Winograd, senior economist, at AllianceBernstein, in New York.
"While I think the magnitude of the market response is exaggerated, the direction is correct: the Fed for the first time this cycle opened the door to rate cuts across a reasonable forecast horizon, and that is significant."
The five-year yield sank to 3.9120% on Thursday, its lowest level since June.
Fed funds futures meanwhile extended their rally in Asian trade and now imply an 85% chance of a first cut in March, with a staggering 156 basis points of easing priced in for all of 2024.
A widely tracked metric of the U.S. Treasury yield curve, showing the gap in yields between two- and 10-year notes , steepened, reducing its inversion to minus 38.20 bps.
Analysts called the yield curve move a bull steepener, in which short-term interest rate posted sharper falls than longer-dated ones. This reflects expectations the Fed will soon start cutting rates.
In his press, Fed Chair Jerome Powell confirmed what the central bank rate projections and statement conveyed: that the question about timing rate cuts is coming into view. He was also well aware of the risks of cutting rates too late.
"Powell ... somewhat surprisingly refrained from pushing back against market pricing for cuts," said Matthew Ryan head of market strategy, at global financial services firm Ebury.
He added that there's a "decent chance we see as many as three or four rate reductions through year-end."
Earlier, the Securities and Exchange Commission (SEC) voted to adopt rules for the $26 trillion U.S. Treasury market aimed at stemming the buildup of systemic risk by requiring more trading to be cleared centrally. The SEC, however, exempted some transactions by hedge funds.
"Clearing brings transparency to the market and reduces counterparty risk," said Chris Slusher, head of rates, at risk management adviser Derivative Path.
"So those are important benefits, but on the other hand, what we found in the derivatives market, clearing increases costs and it often has the impact of leading to the further concentration in the market among dealers." - Reuters
