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Bond Report: Treasury yields drop by most in a week after Fed’s September meeting minutes


Two-, 10- and 30-year Treasury yields dropped by their most in a week on Wednesday following the release of the Federal Reserve’s September meeting minutes, which offered little fresh insights into policy makers’ thinking about the path of future rate hikes.

What’s happening

The yield on the 2-year Treasury

declined 2.7 basis points to 4.287% from 4.314% on Tuesday.

The yield on the 10-year Treasury

dropped 3.7 basis points to 3.901% from 3.938% as of Tuesday afternoon.

The yield on the 30-year Treasury

fell to 1.6 basis points to 3.886% from 3.902% late Tuesday.

Those were the largest one-day drops for the 2- and 10-year rates since Oct. 3, and the largest one-day decline for the 30-year yield since Oct. 4, based on 3 p.m. levels from Dow Jones Market Data.

What’s driving markets

Data released on Wednesday showed U.S. wholesale prices rose for the first time in three months. Wholesale prices climbed 0.4% in September, signaling little progress in the Federal Reserve’s fight to vanquish high inflation. Economists polled by The Wall Street Journal had expected a 0.2% gain.

The minutes of the Fed’s September meeting, also released on Wednesday, offered little in the way of new information for financial markets. It showed that Fed officials were worried about ongoing and “unacceptably high” inflation, and saw little evidence of inflation falling “appreciably.”

In addition, many participants on the rate-setting Federal Open Market Committee viewed the risk of “too much action” on inflation as less costly than “too little action,” and indicated that they’ll likely keep rates higher until they sees “compelling” evidence of declining price gains.

Bond and equity investors alike have been eagerly seeking evidence that inflation has peaked, and therefore are eager to parse the U.S. consumer-price index released on Thursday. Economists forecast that the annual headline CPI inflation rate slipped to 8.1% from 8.3% in the past 12 months.

See: What stock-market investors will be watching in Thursday’s inflation report

Meanwhile, markets are pricing in an 81% probability that the Fed will raise interest rates by another 75 basis points to a range between 3.75% and 4% in early November. The central bank is also still mostly expected to take its fed-funds rate target to between 4.5% and 4.75%, or even higher, by next March, according to the CME FedWatch tool.

Overseas, anxiety over ructions in the U.K. government-bond market continued to be felt.

Read: U.K. bond yields up near 14-year highs after Bank of England stresses support will stop at end of week

What analysts are saying

“The market is currently priced for another 75 basis point Fed rate hike in November and another 50 basis point hike in December,” said Tim Magnusson, chief investment officer of Minnesota-based hedge fund Garda Capital Partners. “I think what the market is currently priced for is about right, and I see us peaking at a 4.5% or 4.75% fed-funds rate by next spring, but only if inflation comes down as projected by the TIPs market.  If it doesn’t, then rates will likely need to go higher still.”

Ahead of Thursday’s CPI report, the market is also current pricing in an 8.1% year-over-year inflation rate for September and a 0.4% or 0.5% monthly core reading, he said via phone. “That is probably right from our analysis. We would be lower than August’s core reading of 0.6%, but the market doesn’t know for sure. We’ve got to see where owners’ equivalent rent and services come in.”

“What the market is really going to pay attention tomorrow is if the core reading is 0.6% or higher — then the market will price in another 25 basis points of hikes for 2023.”

The Fed: Fed more worried about risks of ‘unacceptably high’ inflation than overdoing rate hikes, meeting minutes show

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