^{Source: Business Standard}

Treasury Yields Edge Lower Amid Fed's Conservative Rate Outlook

U.S. Treasury yields drifted downward early Tuesday as investors digested the Federal Reserve’s signal that only a single interest rate cut is likely in 2025 — a more hawkish stance than many had anticipated.

The 10-year Treasury yield fell by 2 basis points to 4.455% as of 1:50 a.m. ET, while the 2-year note eased by slightly more than 1 basis point to 3.97%. The 30-year yield dropped close to 3 basis points after briefly exceeding the psychologically important 5% threshold on Monday. For context, one basis point equals 0.01%, and bond prices and yields move inversely.

Fed's Message: Patience Over Aggression

The market's move comes on the heels of remarks from Atlanta Federal Reserve President Raphael Bostic, who told CNBC on Monday that he's currently leaning toward only one rate cut this year, citing persistent inflationary pressures and global economic uncertainty.

This marks a shift from the Fed's March 2025 projections, which indicated two 25-basis-point cuts next year. Bostic emphasized that while inflation is cooling, the pace remains too slow for aggressive monetary easing.

He also flagged global trade concerns and lingering effects of tariffs as contributing factors that are weighing more heavily than initially expected — a nod to the broader uncertainty stemming from U.S. trade policy shifts in recent years.

Moody’s Downgrade: Symbolic, But Not a Market Game-Changer

Adding to the cautious market mood, Moody’s Investors Service downgraded the U.S. credit rating from Aaa to Aa1 last Friday. While still placing the country in a high investment-grade tier, the move reflects growing fiscal concerns — particularly with rising debt levels and ongoing political deadlock around budget decisions.

Moody’s is the last of the “Big Three” credit agencies to lower the U.S. rating. S&P Global Ratings downgraded the U.S. in 2011, while Fitch Ratings followed in 2023.

Despite the symbolic weight of the downgrade, many experts argue its practical impact is minimal. “While the downgrade sounds dire, it’s unlikely to meaningfully disrupt financial markets,” said Vishnu Varathan, head of macro research at Mizuho Securities, in a note.

He added that U.S. Treasurys remain the world's most trusted and liquid asset — backed by the global reserve currency status of the U.S. dollar. “There are no viable triple-A substitutes deep and liquid enough to challenge the dominance of Treasurys,” he noted.

A Look Back: Tariffs and Yield Volatility

In a reminder of how policy volatility can rattle yields, investors recalled April's bond market tremor, when U.S. yields spiked following former President Donald Trump’s proposal of “reciprocal tariffs” on trading partners. The potential for heightened trade tensions sparked fears of financial instability and pushed the administration to scale back the most aggressive proposals, temporarily stabilizing bond markets.

What This Means for Investors

The bond market’s reaction reflects a recalibration in expectations. After months of pricing in a looser Fed, investors are now grappling with the reality of a slower rate-cut cycle and fiscal stress weighing on U.S. credibility.

For portfolio managers and individual investors alike, this environment calls for a reassessment of duration risk, inflation hedging, and exposure to interest rate-sensitive assets.

Furthermore, Treasurys are still viewed as a safe haven, particularly amid global volatility, but the trajectory of yields — and the Fed’s next moves — will heavily depend on incoming inflation data, geopolitical tensions, and fiscal policy decisions heading into 2025.

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