Fed rate cut bets firm up, Treasuries volatility at three-year low

By Ruth Carson and Masaki Kondo

Swings in the US Treasury market have cooled off with the presidential election in the rearview mirror and as investors become more convinced that the Federal Reserve will cut interest rates.

A closely watched measure of expected volatility in Treasuries fell to levels last seen in February 2022 as easing inflation reinforced bets for a Fed rate cut next week. Still, US jobless claims and producer price data later on Thursday are on the radar for traders as they gauge the US central bank’s next steps.

The reduction in volatility “reflects a combination of softer-than-expected incoming economic data, fading concerns about the effects of tariffs on inflation – at least beyond the short run,” John Higgins, chief markets economist at Capital Economics, wrote in a note. “We don’t expect it to become a whole lot more volatile in 2025 either, even allowing for concerns about the fiscal outlook.”

Yields on 10-year US Treasuries held at 4.28% in early Asia trading Thursday after advancing four basis points Wednesday. Those on two-year notes, which are more sensitive to changes in policy, steadied at 4.16%.

Overnight-indexed swaps are pricing in a 98% chance of the Fed cutting policy rates by 25 basis points on Dec. 18, double the odds seen just after the central bank’s last policy decision on Nov. 7.

“I can’t see any reason for Treasury market volatility to climb,” said Hideo Shimomura, senior portfolio manager at Fivestar Asset Management Co. in Tokyo. “The US economy appears to have entered soft landing. There’ll be no recession. The Fed will continue to ease policy and is likely to say they will be cautious because of Donald Trump’s policies.”

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