U.S. yields climb as investors worry the Fed might be reluctant to cut rates
Treasury yields climbed as trading resumed after the U.S. holiday, a change similar to previous moves in European bond markets that followed hawkish comments from European Central Bank policymakers, leading investors to worry that the Federal Reserve may be reluctant to start cutting rates as early as March.
Markets have been focused on a possible shift to rate cuts by the Fed since inflation fell back from its peak in mid-2022. Investors are awaiting a speech by Fed Governor Christopher Waller scheduled for Tuesday after Fed Chairman Jerome Powell made it clear in December last year that a series of rate cuts would be coming in 2024.
There has been a chorus of Fed and ECB officials trying to tame market expectations for aggressive rate cuts, said Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities in Singapore. For quite some time the market has ignored their utterances, but it does appear the market paid some attention to ECB comments overnight.
Threats stemming from sticky inflation and geopolitical risks will prevent the ECB from cutting rates this year, Governing Council member Robert said in an interview.
The rising U.S. Treasury yields have boosted the dollar's performance against other currencies. The Bloomberg Dollar Spot Index rose 0.3% to 1,230.94 as of 6:05 a.m. London time on Tuesday. An advance beyond the Jan. 5 high of 1,231.44 would bring the gauge to the highest since mid-December.
The dollar's rise was due to higher U.S. yields, said Mingze Wu, a currency trader at Stonex Financial Pte. in Singapore. It might just be the market is finally out of the hungover mood and having their clarity moment that Powell might not be cutting rates at all this year.