Why have Treasury yields declined ahead of FOMC decision?

US treasuries experienced a rally on Wednesday due to slower-than-expected hiring and a surprise loss from New York Community Bancorp, raising concerns about the health of regional lenders.

Two- to five-year Treasury yields tumbled more than 10 basis points as traders priced in a higher likelihood of Federal Reserve interest-rate cuts beginning as soon as March. The bond market is looking for an event that will trigger the Fed to ease policy.

Government bonds rallied globally, with bigger yield declines in several euro-zone markets after slower-than-expected French inflation readings helped the outlook for European Central Bank interest-rate cuts.

In the US, traders increased their bets on Fed rate cuts in 2024, with the potential for the first one in March given about two-thirds odds versus one-third on Tuesday. The two-year Treasury note’s yield declined as much as 15 basis points to 4.18%, the lowest level since Jan. 16.

The Treasury Department has revealed a funding plan for government bonds through April, focusing on short-term debt. The reduced amount reflects higher net fiscal flows and a higher-than-expected cash balance to start the year.

The 10-year Treasury yield began its dramatic retreat after the government cut its Q4 borrowing estimate by $76 billion vs. the level announced in July.