Treasury yields experienced a slight pullback from their highest levels of the year on Monday, as investors awaited fresh economic data. The rates on 2- and 10-year Treasurys dropped after the release of the only major data, which revealed a decline in leading indicators for the U.S. economy in December, marking the 21st consecutive month of decline.

Last week, strong economic reports had pushed Treasury yields to their peak for the year. Weekly initial jobless claims fell to a 16-month low in mid-January, coupled with a surge in U.S. consumer sentiment, and higher-than-expected December retail sales. These reports had led investors to believe that the Federal Reserve may not reduce interest rates as much as previously anticipated in 2024, which contributed to the increase in Treasury yields.

However, as the Federal Reserve entered into its traditional silent period, with no appearances or comments by officials leading up to the central bank's meeting later this month, the market remained cautious. This week will see the auction of 2-year and 5-year Treasury notes, along with data on fourth-quarter gross domestic product and the personal-consumption expenditures inflation measure.

According to Will Compernolle, a macroeconomic strategist at FHN Financial, the convergence between market expectations and Fed action usually occurs gradually. He predicts that expectations for an interest rate cut by the end of the first quarter will likely shift to expectations for a rate cut in May.

While the focus remains on the Fed's monetary policy decisions, Compernolle also highlighted the significance of any updates to the Fed's quantitative tightening and the future of the Bank Term Funding Program. These topics have recently garnered attention following comments from Federal Open Market Committee participants.

As the market eagerly awaits the Fed's decision at the end of the month, investors will closely monitor any shifts in economic indicators and the central bank's monetary policy direction.