Treasury prices rose early Wednesday after yields at 16-year highs attracted buyers to bonds.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
slipped by 1.5 basis points to 5.059%. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated 4.4 basis points to 4.496%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
fell 4.2 basis points to 4.636%.
What’s driving markets
The 10-year Treasury yield hit a fresh 16-year high of 4.56% on Tuesday, forced up by concerns about increased debt issuance, recent data showing a relatively sturdy U.S. economy, and the latest hawkish comments from Federal Reserve officials.
However, buyers emerged and early Wednesday trading saw those benchmark yields pull back to around 4.50%, The likely next big test for Treasurys will be the personal consumption expenditure index data for August, the Fed’s favored inflation gauge, due for release on Friday.
Until then, markets are pricing in an 81% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is priced at 32%.
The central bank is not expected to take its Fed funds rate target back down to around 5% until September 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Wednesday include August durable goods orders, due at 8:30 a.m. Eastern.
The Treasury will auction $49 billion of 5-year notes on Wednesday.
What are analysts saying
John Lynch, chief investment officer at Comerica Wealth Management said that though the Fed may be close to ending hikes in the federal funds rate, it may consider more subtle steps to restrain credit.
“These include higher real rates and balance sheet run-off (quantitative tightening). In addition, increased Treasury security issuance should lead to higher market interest rates, as global investors demand higher yields. We believe these trends should allow Fed Chair Powell to avoid having to raise rates in the upcoming election year, potentially freeing the central bank from political interference,” said Lynch.
“Nonetheless, tight policy should persist, as the economy contends with higher oil prices, slowing growth, and the resumption of student debt payments,” He added.
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