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Investor focus on Federal Reserve policy shifts Treasury yields upward

U.S. Treasury yields witnessed a rise as investors deliberated over the economic outlook and financial market trajectory for the upcoming year. As the year nears its end, the yield on the 10-year U.S. Treasury notes increased by over 3 basis points, reaching 3.826%. Similarly, the yield on the 2-year Treasury notes saw a nearly 3 basis point rise, settling at 4.271%. It’s essential to note that yields and bond prices have an inverse relationship, with one basis point equating to 0.01%.

Investor focus on Federal Reserve policy shifts Treasury yields upward

Investor focus remains intensely on the Federal Reserve’s monetary policy decisions, particularly in light of the looming question of a potential recession as 2024 approaches. In its recent meeting, the Federal Reserve projected three interest rate cuts for the next year and anticipated further easing of inflation. This forecast has spurred optimism among investors about the likelihood of these expectations materializing in 2024.

However, there is ongoing speculation regarding the timing of these rate cuts and their adequacy in preventing a recession, considering that interest rates will remain high even after the reductions. Market expectations, as indicated by CME Group’s FedWatch tool, anticipate the first rate cut during the Federal Reserve’s March meeting. Meanwhile, recent jobless claims data revealed an increase in initial filings for unemployment, rising by 12,000 from the prior period.

Continuing high unemployment claims typically suggest looming economic downturns, but current levels remain below those indicating a recession. Chris Rupkey, chief economist at FWDBONDS, commented on the situation, stating that while signs of a recession are present, the actual onset of a downturn seems delayed, especially as inflation rates have decreased more rapidly than anticipated.

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