Falling Treasury yields helped launch an explosive rebound in stocks and lifted U.S. government bonds from 16-year lows. Now some investors worry that further declines in yields could keep the Federal Reserve in a hawkish stance for longer, potentially hurting asset prices over the longer term.
Federal Reserve Board Chairman Jerome Powell answers a question during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., November 1, 2023. REUTERS/Kevin Lamarque/File PhotoNEW YORK, Nov 9 -
Evidence of the dynamic between yields and financial conditions could be seen in last week’s 0.5% decline in the Goldman Sachs Financial Conditions Index, its sixth biggest weekly drop since 1990. That move came as the benchmark Treasury 10-year Treasury yield fell to a low of 4.48%, from just above 5%.
Policymakers have largely refrained from verbally pushing back on the easing in financial conditions during a flurry of appearances by policymakers this week. Fed Chair Jerome Powell speaks on Thursday in a panel at the International Monetary Fund. Futures markets are now pricing in a roughly 90% chance that the Fed holds rates steady at its December meeting, up from a 57.6% chance seen a month ago, and anticipate that the central bank will begin to rate cuts in May, 2024, according to CME's FedWatch Tool.
To be sure, not every scenario sees the Fed in a higher-for-longer posture if Treasury yields continue falling. Yields falling in the context of a slowing economy, for instance, could suggest that the Fed is achieving its goal of tamping down growth, said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute.
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