Investors prepare for the new year

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The yield on the 10-year Treasury note was little changed on Friday as investor attention focused on the path ahead for the economy and monetary policy, and traders wrapped up a significant year for bonds.

The yield on the 10-year Treasury ross less tgan 2 basis points to 3.866%. The 2-year Treasury yield inched down about 3 basis points to 4.25%.

Yields and prices move in opposite directions. One basis point equals 0.01%.

2023’s been a momentous year for Treasury yields as the Federal Reserve continued its aggressive hiking campaign and investors fretted over high inflation and a potential recession. The yield on the 10-year topped the 5% threshold in October for the first time since 2007, before dropping below 3.9% in recent weeks on bets of an end to rate increases and cuts in the new year.

As investors look ahead to 2024, questions linger over when the central bank will begin initiating those expected cuts, and how many will actually occur.

The Fed said earlier this month that it expects to cut rates three times next year, but some investors are hoping for further reductions. Markets are broadly pricing in the first rate cut to take place in March 2024, according to CME Group’s FedWatch tool.

Uncertainty has also continued about the state of the U.S. economy and whether the Fed will achieve a soft landing and avoid a recession even as interest rates remain elevated.

“We … look for U.S. growth to fall to an annualised rate of less than 1% in H1 2024,” Berenberg chief economist Holger Schmieding said in a note Friday. “Nevertheless, the Fed remains on track to pull off the usually elusive feat of a soft landing in 2024. The easing of underlying inflation has encouraged bond and equity markets to play the Fed pivot theme.”

Schmieding expects the first Fed rate cut in May.

U.S. bond markets closed early on Friday and will remain closed on Monday in celebration of the new year.



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