YaMarkets • 2024-12-16
U.S. Treasury yields climbed to multi-week highs as markets braced for the Federal Reserve’s December policy meeting, where a 25-basis-point rate cut is widely expected. The Fed is also likely to signal a pause in further rate cuts as it tackles sticky inflation still running above its 2% annual target. Benchmark 10-year yields reached 4.403%, their highest level since November 22, while two-year yields rose to 4.241%, reflecting heightened sensitivity to Fed policy.
For the first time since November 2022, the yield curve between three-month Treasury bills and 10-year notes turned positive, ending a prolonged inversion often seen as a recession warning. This steepening of the curve was driven not only by expectations of Fed rate cuts but also by growing concerns over the U.S. fiscal outlook. Market participants noted that the disinversion reflects a fiscal premium on longer-dated debt, coupled with the Fed entering an easing cycle.
The two- and 10-year yield curve, another key recession indicator, turned positive earlier this year in August. While such inversions have historically preceded economic downturns, the current prolonged inversion and subsequent steepening do not necessarily point to an imminent recession. Instead, it highlights uncertainty over economic projections, fiscal policy, and the broader economic outlook.
At the upcoming Fed meeting, policymakers are expected to deliver a 25-basis-point rate cut while providing updated economic projections through the "dot plot." Markets expect that the Fed will emphasize a pause in rate cuts for January, citing sticky inflation and the potential for renewed price pressures due to anticipated fiscal stimulus and trade policies under the incoming Trump administration.
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, will be closely watched following the meeting. November’s headline and core PCE data are projected to rise by 0.2% month-on-month, translating to annual increases of 2.5% and 2.9%, respectively.
With longer-dated yields climbing due to fiscal concerns and the Fed signaling a cautious approach to further easing, markets will need to navigate a complex landscape of monetary policy, inflation trends, and fiscal dynamics. While the steepening yield curve may offer a reprieve from recession fears in the near term, the broader outlook remains uncertain as policymakers grapple with balancing growth, inflation, and financial stability.
For investors, the key takeaway from this week’s developments is that while rate cuts may provide short-term relief, the long-term fiscal and economic outlook will remain critical in shaping market dynamics heading into 2025.
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