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Post: Bond Report: Treasury yields rise across the board ahead of conclusion of Fed’s 2-day policy meeting

Yields for U.S. government debt climbed broadly Tuesday as the Federal Reserve kicked off its two-day policy meeting, which concludes on Wednesday, with investors awaiting a statement from rate-setters that could set the tone for trade in 2022.

Data released on Tuesday showed that U.S. consumer confidence slipped in January, though remained above forecasts, while home price rises in 20 major U.S. metropolitan areas leveled off late last year.

What are yields doing?
  • The 10-year Treasury note

    yields 1.784%, up from 1.735% at 3 p.m. Eastern Time on Monday, when the yield fell to its lowest since Jan. 13. Yields rise as prices for debt fall.

  • The 2-year Treasury note rate

    was at 1.025%, on a new issue basis, up from 0.950% a day ago.

  • The 30-year Treasury bond yield

    was at 2.129%, versus Monday’s 2.083% level.

What’s driving the market?

The Fed’s rate-setting meeting began on Tuesday and comes as equities remain turbulent, colored by volatile trading over the past week as anticipation grows for more hawkish monetary policy.

Stock markets dipped earlier in the session but also reversed course, paring significant losses, highlighted by a swing that saw the Dow Jones Industrial Average

down 818.98 points, or a 2.4% decline, before shedding most of that drop to end the day with a decline of 0.2%.

The central bank’s policy-setting Federal Open Market Committee is expected to lay the groundwork for a benchmark interest rate increase in March, and to further discuss how fast it will shrink its balance sheet once it is ready to do so.

Minutes of the Fed’s December meeting, released early this month, surprised the market with just how much policy makers had already discussed shrinking the central bank’s nearly $9 trillion balance sheet.

Read: Forget Rate Hikes. How the Fed Handles Its $9 Trillion in Assets Is What Really Matters.

Policy makers will likely keep in mind the past bout of market volatility, which resulted in a surge in yields and turbulence in stocks, that followed a spring 2013 signal that the central bank was preparing to wind down the asset-buying program put in place during the 2008 financial crisis.

Market-based projections show that investors are anticipating that the Fed will raise rates, which stand at a range between 0% and 0.25%, three or four times in 2022.

Fed-funds futures show traders also see a roughly 5% chance of a 50-basis-point, or 0.5 percentage point, hike, rather than a 25-basis-point move, by the Fed at the March meeting, according to the CME FedWatch tool

In U.S. economic reports on Tuesday, the S&P CoreLogic Case-Shiller 20-city price index posted a 18.3% year-over-year gain in November, down slightly from 18.5% the previous month. Home-price growth is seen as being at a turning point amid rising mortgage rates, with last summer’s breakneck pace not likely to be repeated in the coming months. The Case-Shiller national home price index demonstrated 18.8% growth between 2020 and 2021 in November, also down from the prior month.

Meanwhile, U.S. consumer confidence fell to 113.8 in January from a revised 115.2 the prior month, though the January figure was still above the median forecast of economists polled by The Wall Street Journal.

In Treasury dealings, an auction of $55 billion in 5-year Treasury notes

saw strong bidding. The bid/cover was 2.50, the highest since October, according to economists at Jefferies. The bid-to-cover ratio reflects demand from buyers compared with the amount of notes sold as a gauge of the success of the auction. Above-average bidding is usually a sign of robust appetite for the debt.

“Overall, this was basically déjà vu after the 2-year note auction yesterday which also generated a big short stop and a strong indirect takedown,” wrote the economists, referring to indirects, a class of investors that includes foreign central banks.

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What analysts are saying

Fed policy makers “really need to get their arms around the balance sheet and what the plan is there, in order to not do any pre-emptive tightening, and come to a mind meld about what they are doing in March and whether a 50-basis-point rate hike is on the table,” said Greg Staples, head of fixed income in North America for DWS Group in New York. “They’re not going to want to commit way too soon.”

“The balance sheet would impact inflation and be far more effective in terms of mortgage rates than hiking would be,” Staples said via phone. “They could signal there will be no more reinvestment in agency MBS or choose to sell those assets, which would impact the longer end of the curve — whereas a 25- or 50-basis-point hike in the fed-funds rate would affect the front end.”

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