U.S. Treasury yields rose on Tuesday as markets turned their focus to the Federal Reserve’s first meeting of the year, where decisions on interest rates could set the tone for the months ahead. At 5:58 a.m. ET, the 10-year Treasury yield climbed over 4 basis points to 4.571%, while the 2-year yield gained more than 3 basis points, reaching 4.228%.
Investors are closely monitoring the Federal Open Market Committee (FOMC) meeting, which spans Tuesday and Wednesday, anticipating the Fed’s announcement on monetary policy. Despite external pressures, including remarks from newly inaugurated U.S. President Donald Trump demanding immediate rate cuts during a keynote address at the World Economic Forum in Davos, expectations for a rate reduction remain low. The Fed’s December meeting signaled only two potential rate cuts in 2025, reflecting a cautious approach.
Market sentiment points to a high likelihood of stability, with traders pricing in a 97% chance that interest rates will remain unchanged, according to the CME Group’s FedWatch Tool. Still, the meeting comes at a pivotal time, as economic uncertainty and external shocks influence investor behavior.
Treasury markets experienced turbulence on Monday as investors flocked to safe-haven assets amidst a dramatic sell-off in the stock market. The catalyst? Chinese AI startup DeepSeek unveiled an open-source AI model that reportedly outperforms OpenAI at a fraction of the cost, sending shockwaves through the tech sector. The model, developed for under $6 million, raised questions about the vast sums poured into AI by major players, triggering sharp declines in the Nasdaq Composite and S&P 500.
The unexpected tech disruption fueled skepticism among investors, intensifying the shift toward Treasuries as a safer alternative. “This event underscores the vulnerability of overvalued tech investments,” said an analyst, emphasizing the growing scrutiny on AI spending.
Beyond the Fed meeting, all eyes are on Friday’s release of the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge. The data will provide critical insights into the health of the U.S. economy and could influence the Fed’s policy trajectory. Economists expect the index to shed light on whether inflation is moderating or remains stubbornly high, further shaping market expectations.
While the Fed is widely expected to maintain its current rate policy for now, the unfolding dynamics—from geopolitical shocks to innovative tech breakthroughs—are keeping investors on edge. With uncertainties looming large, this week’s developments could pave the way for significant market shifts in the weeks to come.
