Treasury yields were little changed to slightly lower Wednesday morning as traders awaited minutes from the Federal Reserve’s July policy meeting.
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
slipped by 3.8 basis points to 4.914% from 4.952%. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated less than 1 basis point to 4.213% from 4.22%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
advanced 1.7 basis points to 4.335% from 4.318%. - Tuesday’s levels were the highest for the 10- and 30-year yields since Oct. 24, 2022, based on 3 p.m. Eastern time figures from Dow Jones Market Data. In addition, the 10-year rate ended Tuesday’s session at one of its highest levels since 2008.
What’s driving markets
The main focus for traders on Wednesday is the 2 p.m. Eastern time release of the Federal Reserve’s minutes from its July 25-26 meeting. Traders will be eager to glean any additional information on the central bank’s thinking about interest rates, as inflation remains above its 2% target and data suggests the U.S. economy hasn’t buckled under higher borrowing costs.
U.S. economic data released on Wednesday showed that builders ramped up construction of new homes in July, with housing starts rising to a 1.45 million annual pace from 1.4 million in June. Industrial output was up 1% in July after a revised 0.8% decline in the prior month.
Fed funds futures traders are pricing in an 88.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%- 5.75% at the subsequent meeting in November is priced at 34.7%.
Over in Europe, there was better news on inflation from the U.K., where headline annual consumer price growth eased to 6.8% in July, down from 7.9% the prior month. The 10-year gilt yield
BX:TMBMKGB-10Y
rose 4.3 basis points to 4.634% as the market continued to price in the Bank of England raising interest rates to 6% this cycle.
What analysts are saying
Referring to the theoretical level of the fed funds rate that is neither accommodative nor restrictive, Mike Sanders, head of fixed income at Madison Investments, which oversees $22.9 billion, said that “the market is expecting a higher neutral rate than it did just a few months ago.”
“The Fed has signaled a 2.5-3% long-term neutral rate, and now the market is higher than that,” Sanders wrote in an email. “And if you assume a normal curve environment and the Fed is not able to cut interest rates down to their long-term neutral target, it could imply a 10-year rate of 4.5% or higher.”
“In our view, inflation is going to be stickier long-term, and getting from 3% to 2% inflation will be the Fed’s most difficult task. We still think the economy will slow in the back half of this year and the job market will loosen. We’ll be watching for fears of a 2024 slowdown to pick up in the final months of 2023.”
This story originally appeared on Marketwatch
