A look at the day ahead in U.S. and global markets from Mike Dolan
With tariff tensions easing a touch for now and price pressures coming off the boil, U.S. Treasury yields have plunged this week – defusing a tense January for bond markets and helping stocks find a foothold in the thick of a noisy earnings season.
Although they backed up a touch early Thursday, 10-year Treasury yields have sliced below 4.5% – dropping more than 10 basis points at one point on Wednesday to their lowest of the year as January ISM service sector readings showed a surprise drop in the prices paid by businesses.
Along with the prior day’s news on some cooling of the labor market and this week’s delays in U.S. tariff hikes on Mexico and Canada, the drop in yields came largely independently of futures thinking on Federal Reserve interest rates.
With Fed officials still minded to keep easing slowly and gradually as they assess President Donald Trump’s economic policies, two cuts this year remain the best bet. Noted Fed board dove Chris Waller is due to speak later today.
But the drop in long yields was encouraged by a mix of this week’s quarterly Treasury refunding details, a geopolitical safety bid at the margin and comments from new Treasury Secretary Scott Bessent on the administration’s stance on lower borrowing rates.
Despite some fears of a future “terming out” of the Treasury’s heavy debt-raising schedule to longer-term tenors, the refunding announcement on Wednesday showed no increase in size of note and bond auctions through the April quarter. And, crucially, there was no guidance on when they would increase. That was a relief.
Bessent then said that, while Trump wants lower interest rates, he would not ask the Fed to cut them – putting the emphasis instead on getting 10-year yields down.
If the economy is de-regulated with more private sector investment, “interest rates will take care of themselves and the dollar will take care of itself”, he told Fox Business Network.
Falling crude oil prices this week have also calmed the horses.
As debt yields clawed back a few basis points on Thursday, the dollar also firmed up against most currencies – even though dollar/yen briefly touched its lowest in almost a month as Bank of Japan rate rise speculation has turned up a notch on this week’s wage rise data there.
But Japan aside, central bank easing elsewhere is set to continue apace.
GILT TRIP
After rate cuts last week from the European Central Bank and Bank of Canada, the Bank of England is widely expected to cut its key policy rates on Thursday by a quarter point – with at least two more pencilled in by markets for the rest of the year.
