Bond yields rose on Thursday as investors continued to price in the chances of more interest rate rises by the Federal Reserve.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.748%
rose 4.3 basis points to 4.727%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.832%
added 2.2 basis points to 3.815%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.906%
gained less than 1 basis points to 3.890%.
What’s driving markets
The 2-year U.S. government bond yield was trading at its highest level since March — when the regional banking crisis roiled markets — as investors absorbed the latest policy projections by the Federal Reserve.
The central bank on Wednesday left interest rates unchanged at a range of 5% to 5.25% but a majority of governors said they expected borrowing costs to rise two more times this year.
Markets are pricing in a 72% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25% to 5.50% after its meeting on July 26, according to the CME FedWatch tool.
So far traders seem unwilling to bet on a second 25 basis point hike but they have reduced bets on any cuts this year. The central bank is now not expected to take its Fed funds rate target back down to around 5% until April 2024, according to 30-day Fed Funds futures.
The weekly initial jobless claims report will be published at 8:30 a.m., alongside May retail sales and import prices, and the June Empire State and Philadelphia Fed manufacturing surveys. Industrial production and capacity utilization numbers for May will be released at 9:15 a.m., all times Eastern.
Meanwhile, 2-year German government bond yields
TMBMKDE-02Y,
the eurozone benchmark more sensitive to monetary policy moves, was up 4.8 basis points to 3.061%, ahead of an expected 25 basis point rate rise by the European Central Bank on Thursday.
What are analysts saying
“The Fed did their best to sound hawkish as they delivered the first pause since the start of the hiking cycle. Powell’s inadvertent use of the word ‘skip’ made a July rate hike seem likely, but the Chair quickly corrected himself to use the more noncommittal ‘pause’. We see the Fed simply buying themselves the optionality to continue tightening monetary policy if needed while hoping to avoid over-tightening,” said analysts at TD Securities led by chief U.S. macro strategist Oscar Munoz.
“The Fed’s message will likely keep markets guessing, but we believe that talk is cheap. While the Fed may well deliver another hike or two by the end of the year if economic data doesn’t materially slow, moderating inflation and labor market momentum should keep the Fed on the sidelines for the remainder of the year,” TD added.
This story originally appeared on Marketwatch
