U.S. bond yields were slightly higher on Tuesday in cautious trading ahead of next week’s Federal Reserve policy meeting.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.524%
gained 5 basis points to 4.533% versus 4.480% at 3 p.m. Eastern on Monday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.699%
rose 5 basis points to 3.728%, compared with 3.691% late Monday. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.882%
was up 3 basis points to 3.917%, compared with 3.890% Monday.
What’s driving markets
There are no U.S. economic data releases of note on Tuesday and no comments due from Federal Reserve officials during the usual so-called media blackout ahead of the next monetary policy meeting on June 14.
Markets are pricing in a 75.9% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.
However, chances of a 25 basis point hike to 5.25% to 5.50% is in July is priced at 53.6%.
These probabilities are little changed from the start of the week and this is reflected in meagre moves in yields across U.S. bond maturities.
That was not the case in Australia, however, where 2-year government bond yields jumped 7 basis points to 3.844% after the central bank delivered a second surprise 25 basis point rate hike in a row.
What are analysts saying
Morgan Stanley has produced some early thoughts on what it expects from next week’s Federal Open Market Committee meeting:
“Regarding current conditions, we expect the FOMC statement to acknowledge some slowdown in economic activity (in line with the spirit of the Beige Book, which described activity as “little changed” but with two districts with moderate declines). Elsewhere we expect little change in current conditions, e.g. inflation remains elevated, and job gains continue to be robust,” said the MS team led by Ellen Zentner, chief U.S. Economist,
“For the press conference: We expect the Chair’s press conference to be heavily focused on communicating that the Fed will be on hold for an extended period of time. The Chair will also likely emphasize that the FOMC stands ready to increase rates further if economic activity and inflation are not to come in line with the Fed’s expectations for more moderation. We would also expect the Chair to acknowledge that the range of views in the Committee as to what would be the appropriate next step has widened,” MS concluded.
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