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Bond Report: 2-year Treasury yield touches 4.1%, carves out nearly 15-year high after Fed raises rates by another 75 basis points

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Treasury yields from one year to three years out rose on Wednesday, pushing the 2-year rate briefly above 4.1%, after the Federal Reserve delivered another 75-basis-point interest rate hike and updated its rate projections.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.027%

rose 3.1 basis points to 3.993% from 3.962% on Tuesday. Wednesday’s level is the highest since Oct. 16, 2007, based on 3 p.m. ET levels, according to Dow Jones Market Data. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.515%

declined 6 basis points to 3.511% versus 3.571% as of Tuesday afternoon. That’s down from an 11-year high reached on Tuesday.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.487%

fell 6.3 basis points to 3.518% from 3.581% late Tuesday.

What’s driving markets

As widely expected, Jerome Powell and his colleagues at the Federal Reserve raised the fed-funds rate target on Wednesday by another 0.75 percentage point, to a range between 3% and 3.25%. In addition, policy makers penciled in a median estimate for the fed-funds rate to possibly reach 4.4% by year-end and 4.6% in 2023, followed by rate cuts in 2024, 2025 and the long run.

The rate-setting Federal Open Market Committee is “strongly” resolved to bring inflation down to 2% and will keep at it “until the job is done,” Powell told reporters after the FOMC’s policy statement was released. When asked about the prospect of a pause in the Fed’s rate-hike campaign, he said it’s “very hard to say with precise certainty” how things will unfold, but there’s a possibility policy makers could lift rates to a certain level and leave them there. He also said there’s no way to get inflation down in a painless manner, and a period of much lower growth is very likely in store.

Read: Fed predicts big slowdown in economy and rising unemployment as it battles inflation and Fed’s tough task: History shows inflation takes average of 10 years to return to 2%

Seven- through 30-year yields fell as buyers returned to the intermediate and long end of the Treasury market. Earlier in the day, geopolitical risks were seen as one contributing factor that sent investors to the perceived safety of long-term U.S. government bonds after Russian President Vladimir Putin escalated his war against Ukraine.

Meanwhile, U.S. data showed existing-home sales falling for a seventh straight month, by 0.4% in August.

What analysts are saying

“In the near term, the Fed was more hawkish than markets expected, but more dovish long-term given the prospect of rate cuts in 2024 and into 2025,” said Tom Garretson, a Minneapolis-based senior portfolio strategist at RBC Wealth Management.

The Fed’s policy announcement “is right down the middle of recent market expectations,” and that’s why “markets are not moving much,” said Rich Sega, global chief investment strategist at Hartford, Conn.-based Conning, an institutional asset management firm which oversees $191 billion. However, long-term yields appeared to be falling on “a lot of concern that the Fed’s policy actions could slow the economy and pull down corporate earnings.”

In sum, the Fed’s summary of economic projections “continues to paint a soft landing scenario,” said Jefferies economists Thomas Simons and Aneta Markowska. “Once again, it is hard to believe that the Fed is capable of pulling off such a delicate landing of the economy onto a gradual glide path towards somewhat lower growth, only mildly higher unemployment, and on-target inflation. Nobel Prizes will be in order if this goal can be achieved while avoiding a recession.”

Key Words: Biden competition adviser points to railroad, shipping industry concentration as driver of inflation

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