Bond yields fell on Tuesday as the market looked to settle following a period of marked volatility.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell by 2.5 basis points to 4.899%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated 5.3 basis points to 4.596%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
dropped 4.2 basis points to 4.768%.
What’s driving markets
The Treasury market is striving to stabilize after notable volatility over the past week or so. Hopes that the Federal Reserve may have finished increasing interest rates caused the benchmark 10-year yield to drop from a cycle high around 5% to 4.5% in the space of a dozen or sessions.
However, concerns the rally in bond prices was too far too fast caused a pop back up to 4.67% on Monday. Yields are nudging lower again Tuesday, but the moves are less marked than of late.
Stephen Innes, managing partner at SPI Asset Management, postulated that the yield rebound at the start of the week may have reflected traders’ concerns that financial conditions had eased too quickly for the Fed’s liking.
“{T}he Fed could fall victim to its own success. Fed officials had been using various forums and public appearances to communicate a nuanced message to the market: the sharp increase in long-term U.S. Treasury yields that began in August could effectively replace the final rate hike indicated by the September dot plot,” said Innes in an email.
Conveying this message sparked a bond rally, leading to a reversal of the very dynamic that the Fed was trying to achieve, Innes added. “If long-term yields fell and stock prices rose, it would ease financial conditions, potentially negating the justification for skipping the final rate hike,” he said.
A reminder for investors that central banks could readily revive rate hikes if inflation proved sticky came from Australia, where the Reserve Bank on Tuesday lifted interest rates by 25 basis points to 4.35%, its first increase since June.
Still, markets are pricing in a 90 probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th, 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 at the end of January is priced at 15%. The central bank is not expected to take its Fed funds rate target back down to around 5% until July 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Tuesday include the trade deficit for September, due at 8:30 a.m. Eastern, and consumer credit for September at 3 p.m.
A number of Fed officials are due to speak throughout the day, including Vice Chair for Supervision Michael Barr discussing FinTech at 9:15 a.m., Governor Christopher Waller talking about the value of economic data at 11 a.m., and President of the New York Fed John Williams addressing the Economic Club of New York at noon.
The Treasury will auction $48 billion of 3-year notes at 1 p.m. Eastern.
This story originally appeared on Marketwatch
