Monday marked the start of the last full trading week of 2023, and the yield on the 10-year Treasury note continued to decline.

Traders are still processing the surprisingly dovish U.S. Federal Reserve this past week. In addition to keeping its benchmark interest rate unchanged, the central bank said that at least three rate cuts were planned for 2019 - a more aggressive round of reduction than had previously been suggested.

(Photo : by Win McNamee/Getty Images)
Monday marked the start of the last full trading week of 2023, and the yield on the 10-year Treasury note continued to decline.

The 10-year Treasury's yield was 3.913%, just a little bit lower. The yield dropped below 4% last Thursday, reaching its lowest point since July.

The yield on the 2-year Treasury note dropped 3 basis points to 4.423%, which is below the carefully monitored 4.5% mark.

Prices and yields move against each other. 0.01% is equivalent to one basis point. The Fed's action was hailed by strategists at Deutsche Bank as a "huge shift" away from the higher-for-longer thesis on Monday.

Futures for US stocks increased on Monday morning. Results for the housing market index are anticipated on Monday, and two U.S. There will be two Treasury auctions: one for 13-week notes and another for 26-week bills.

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Fed's Dovish Pivot and Market Implications

Last Wednesday, December 13, the US Federal Reserve made a dramatic shift to the dovish side. According to its most recent "dot plot" projection for the trajectory of the Fed funds rate, three rate cuts (or 75 basis points) are penciled in for 2024. This is an increase from the two rate cuts projected in the dot plot from September of last year, which in turn led to an increase in market participants' dovish expectations to price in six rate cuts, or 150 bps in total, in 2024 via the 30-day Fed funds rate futures calculated by the CME FedWatch tool.

A recessionary scenario appears to be imminent in 2024, which might further drive the US 10-year Treasury real yield lower. This type of dovish expectation has skewed towards a quick pace of the Fed funds rate decreases prediction in the forthcoming monetary easing cycle.

Intermarket study indicates that since gold does not generate "fixed coupons income streams" as bonds do, a further decline in the US 10-year Treasury real yield may support another wave of potentially impulsive gold price increases.

A hawkish statement made by Fed official Williams last Friday, December 15, indicated that the FOMC should not prioritize discussing its first rate cut in March 2024. This is in contrast to the high chance of 75% of a 25 bps rate cut in March 2024 FOMC, as priced in by the 30-day Fed funds futures calculated by the CME FedWatch tool as of December 15, 2023. This contributed to the slight decline of -1.5% seen in Spot Gold (XAU/USD) from Thursday, 14 December ex-post FOMC high of US$2,048.

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