Benchmark Treasury yields firm but near recent lows on slowdown fears.

The Fed raised rates by 50 basis points last week to a range of 4.25% to 4.5% and officials at the central bank have made clear they think borrowing costs may have to stay higher for longer than many in the market think. There was tough talk too on rate rises from the European Central Bank last week, which also raised rates by 50 basis points.

Investors seem not to have taken the Fed at its word, however, and since last week’s comments from chairman Jay Powell, they are betting on a lower “terminal rate” for borrowing costs in this cycle, believing the damage to the economy has already been done.

Markets are pricing in a 74% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool.

But now the central bank is expected to take its Fed funds rate target to 4.83% by May 2023, according to 30-day Fed Funds futures. A few weeks ago that terminal rate was a fraction above 5%.

This is reflected in the 2-year Treasury yield, which is more sensitive to Fed policy, dipping on Monday, while longer duration bond yields inch up off recent lows.

U.S. economic updates set for release on Monday include the NAHB homebuilders index for December, due at 10 a.m. Eastern.

What are analysts saying

“The market doesn’t believe the Fed, with a pricing disconnect now opening up, and the market is now worried the ECB has upped its level of hawkishness… We won’t hear much from these two central banks before Xmas so there is unlikely to be much official follow-through to last week’s meetings. It will therefore be left to quite a full slate of data to move markets in what is likely to be a week low on liquidity,” wrote Jim Reid, strategist at Deutsche Bank in a morning note.

“The U.S. consumer will be a big focus with consumer confidence (Wednesday) and personal income data, along with PCE inflation (both Friday). We’ll also see various housing market and business activity indicators from the US, as well as Japan’s CPI report and PPI numbers from Europe,” Reid added.