With Fed Rate Announcement Scheduled For Wednesday, Here’s How US Treasury Yields Are Behaving

• Liz Ann Sonders, chief investment strategist, Schwab Center for Financial Research, stated that the Fed is likely to cut rates this week.
• However, she added that it would not be a surprise if the Fed’s commentary on the cut took a hawkish tone, similar to the October FOMC meeting.
• SCFR’s Nathan Peterson stated that whether a Santa Claus rally in stocks is thwarted or not will depend on the velocity of the rise in long-term U.S. Treasury yields.

Ahead of the Federal Reserve’s December rate announcement scheduled for Wednesday, U.S. Treasury yields were holding steady on Monday morning.

At the time of writing, the 10-year, 30-year, and 2-year Treasury yields were up by a basis point each. While the 10-year Treasury yield hovered at 4.15%, the 30-year yield was 4.8%, and the 2-year yield was 3.57%.

The 30-year Treasury yield has now risen to a three-month high. Treasury prices and yields are inversely related – a rise in prices is accompanied by a fall in yields, and vice versa.

"If long-term Treasury yields continue to rise, will that thwart a Santa Claus rally for stocks?" asked Nathan Peterson, director of derivatives research and strategy, SCFR.

He added that this will depend on the velocity of the rise of Treasury yields, if it happens. “I feel like the trajectory of stocks this week will likely be tied at least in part to the trajectory of long-term Treasury yields,” Peterson said.

What Are Fed Rate Cut Chances?

According to data from the CME FedWatch tool, there is a 87.4% probability of a 25-basis-point rate cut this week.

“The Fed doesn't tend to go against market odds when they're that extreme in one direction or another,” said Liz Ann Sonders, chief investment strategist, Schwab Center for Financial Research (SCFR), referring to odds of a cut this week.

However, she added that it would not be a surprise if the Fed’s commentary on the cut took a hawkish tone, similar to the October FOMC meeting, when Fed Chair Jerome Powell shot down expectations of further rate cuts.

This comes amid signs of a cooling labor market. According to data released by payroll processing firm ADP last week, U.S. companies unexpectedly cut 32,000 jobs in November amid an uncertain macroeconomic environment.

When Is The FOMC Meeting?

The FOMC’s two-day meeting is scheduled for December 9 and 10.

The Fed is also increasingly divided on a December cut. While Fed Governor Stephen Miran called for a “minimum” of 25 basis point cut in December, Fed Vice Chair Philip Jefferson cautioned that the central bank should “proceed slowly” in light of an evolving balance of risks.

Meanwhile, U.S. equities gained in Monday’s pre-market trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up by 0.13%, the Invesco QQQ Trust ETF (QQQ) gained 0.25%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.07%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘bearish’ territory.

The iShares 7-10 Year Treasury Bond ETF (IEF) was down by 0.12% at the time of writing.

Also See: Kevin Hassett Reportedly Says 'It's A Good Time' For Fed To Reduce Rates Cautiously

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