Could Treasury Yield Predicts Fed’s Next Moves?

One lesson traders and investors are urged to learn is that the bond market is often almost correct; particularly two-year Treasury note. Its direction is of high consideration for those who are interested in knowing about the direction of the Federal Reserve’s actions.  

US Treasury yields fell on Thursday in choppy trading, after data showed headline consumer prices fell in December for the first time in two and a half years, affirming expectations that the Fed will continue to slow the pace of rate increases.

10-year note and 30-year bond yield sank to four-week lows. A closely tracked part of the US yield curve, measuring the gap between yields on two- and 10-year Treasury notes, narrowed its inversion to -68.5 basis points (bps) from its level earlier in the session.

The inversion, which typically precedes recession, went as deep as -85.80 bps right after the inflation data, the most inverted in four weeks. The narrowing of the curve inversion suggested that investors are pricing in fewer Fed rate hikes. Thursday’s data showed the consumer price index dipped 0.1% last month after gaining 0.1% in November. That was the first fall in the CPI since May 2020, when the economy was reeling from the first wave of COVID-19 infections.

In the 12 months through December, the CPI increased 6.5%, the smallest rise since October 2021, and followed a 7.1% advance in November. This is why it is believed that supersized Fed rate hikes are no longer the fed’s favourite option and rather, the CPI data put the Fed back on the 25-basis point track.

What is the chart saying?

The monthly closing chart of the two-year T-note yield indicates tough resistance in the 5% zone dating back 30 years. Last November, the yield reached 4.80% and currently, the momentum broke its two-year uptrend, signaling that yields will be declining, just as they did in 2018 when the yield peaked at 3% and then sank to just 0.15%. Now traders as well as investors wait to see how much the two-year yield will fall this time.

The weekly two-year T-note yield chart indicates trading below the 11-week moving average for eight consecutive weeks (the longest since March 2021), a weekly close below 4.13% would confirm that the two-year had topped.