On Tuesday, the Federal Reserve’s decision to maintain interest rates for the fifth consecutive time was met with mixed reactions in the bond market. While yields on 10-year Treasury notes continued to rise, reaching their highest level since November 28, traders were reevaluating the possibility of a rate cut in June.
The benchmark rate rose almost 7 basis points to 4.397%, but this gain was outweighed by a nearly 1 basis point increase in the yield of the 2-year Treasury note. Yields and prices move in opposite directions, with one basis point equaling 0.01%. Despite this, investors remained cautious about the possibility of significant Fed rate cuts moving forward.
This caution was exacerbated by data released by the Institute for Supply Management (ISM) on Monday showing that manufacturing in the U.S. expanded for the first time in 17 months, with an ISM manufacturing index of 50.3 surpassing expectations of growth at this time. This unexpected uptick in U.S. manufacturing growth has led some investors to question whether the Fed will be as aggressive with its rate cutting policies as previously anticipated.
Based on fed futures trading, the likelihood of a rate cut in June has decreased to around 58.8%, compared to about 70% a week prior. The Federal Reserve decided to maintain interest rates for a fifth consecutive month last month, keeping the overnight borrowing rate steady within a range of 5.25%-5.5%. However, market analysis suggests that the Fed is taking a conservative approach and waiting for further data before making any decisions regarding monetary policy adjustments.
Overall, it remains uncertain whether significant rate cuts will occur soon or not as market pricing currently anticipates three cuts starting from June but it is contingent on economic data trends and other factors that may affect inflation and growth prospects in America’s economy.
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