Federal Reserve officials adopt a dovish stance, U.S. Treasury yield curve briefly inverts, hopes for a rate cut in December reignited

According to Zhitong Finance APP, U.S. Treasury bonds recovered losses from early Monday morning, with market sentiment further boosted in New York's late trading due to a key Federal Reserve official opening the door for further monetary policy easing later this month. Traders are preparing for this week's significant economic data and shifting to a defensive stance, with U.S. Treasury yields peaking before the ISM manufacturing activity exceeded expectations, although the price sub-index was weaker than expected. The yield on the U.S. five-year Treasury bond rose by as much as 9 basis points to around 4.14%, partially undermining the bond market's gains at the end of November. The five-year Treasury yield fell sharply by 25 basis points last week, dropping below 4.08% in late New York trading. As the market recovered from Monday morning's decline, longer-term Treasury bonds outperformed short-term bonds, briefly pushing the 10-year Treasury yield below the two-year Treasury yield, resulting in an inverted yield curve. Market sentiment shifted when Federal Reserve Governor Waller stated in a prepared speech that he was considering "supporting a rate cut at the December meeting." These remarks boosted short-term Treasury bonds, causing the two-year yield to drop to an intraday low of around 4.17%, and prompted traders to price in a rate cut of about 17 basis points during the policy meeting on December 18, equivalent to a roughly 70% probability of a 25 basis point cut, up from 60% earlier. Atlanta Fed President Bostic stated earlier on Monday that he had not yet decided whether a rate cut was necessary this month, while Waller also indicated that the December cut "will depend on whether the data we receive before then exceeds expectations and changes my forecast for the inflation path." Currently, the Federal Reserve has lowered the policy rate by 75 basis points to a range of 4.5% to 4.75%, and market expectations for future meetings will depend on the tone of labor factors in this week's manufacturing and services reports, as well as the job vacancy data released on Tuesday and the ADP private sector employment data released on Wednesday. Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities, stated, "For every investor who agrees with the current valuation, the question is whether the combination of 'inflation controlled at somewhat lower prices, good private sector employment, and lower interest rates' can prevail." Pause on Rate Cuts Traders expect the Federal Reserve may pause rate cuts early next year, with a total expected cut of only 36 basis points across the three meetings ending in March. The decision early next year will be made against the backdrop of the incoming Trump administration, which is seeking stronger economic growth through tax cuts and deregulation while raising tariffs seen as affecting inflation. Patricia Zobel, head of macro and economic research at Guggenheim Investments, stated that she is focused on the latest interest rate forecasts to be released by Federal Reserve officials later this month "There is a lot of uncertainty in the appropriate setting of monetary policy, including the neutral interest rate," said Zobel, who worked in the market department of the New York Federal Reserve for over 20 years. Traders indicated that a large issuance of corporate bonds drove an initial surge in yields on Monday, while reports regarding the breakdown of the ceasefire agreement between Israel and Hezbollah last month also contributed to the reversal of yields. Earlier, New York Federal Reserve President Williams stated that more rate cuts are expected in the future, and it would be appropriate to push rates to neutral levels over time. Traders are still focused on Chairman Powell's speech scheduled for Wednesday. The highlight of the week will be the November employment report released on Friday. The dollar rose due to an increase in U.S. Treasury yields, but later gave back gains after the Bloomberg Dollar Spot Index rose 0.4% later in the day. In Europe, the spread between French and German debt widened significantly due to ongoing concerns about the potential overthrow of the French government. RJ O’Brien Managing Director John Brady stated, "With the political explosion in France, sovereign risk is being repriced, and we will soon see a slow-motion train wreck in Europe."