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Post: Bond Report: Treasury yields slip as investors assess Fed rate hike

Treasury yields pulled back from nearly three-year highs early Thursday as investors assessed the Federal Reserve’s decision a day earlier to hike interest rates and lay out a path for further monetary tightening.

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

    fell to 2.116%, down from 2.185% at 3 p.m. Eastern on Wednesday.

  • The 2-year Treasury note yield

    was 1.914%, down from 1.956% Wednesday afternoon.

  • The 30-year Treasury bond yield

    stood at 2.38%, falling from 2.456% late Wednesday.

  • Based on 3 p.m. levels, the yields on the 10- and 2-year notes on Wednesday afternoon were the highest since May 30, 2019, according to Dow Jones Market Data.

What’s driving the market?

The Fed, as expected, delivered a quarter-point rate hike on Wednesday afternoon and signaled it would lift rates six more times before the end of the year as it attempts to get a handle on persistently high inflation. Chairman Jerome Powell said the Fed’s policy-setting Federal Open Market Committee, or FOMC, could finalize its plan to begin shrinking the central bank’s nearly $9 trillion balance sheet by the next meeting of policy makers in May.

Read: Fed’s Powell sees the light—and turns far more hawkish than expected

Also see: The Fed got inflation badly wrong—and now it admits there’s no quick fix

Treasury yields surged higher following the decision, but then trimmed the rise. The yield curve, a line plotting yields across all maturities, flattened as rates for shorter-dated maturities rose more quickly than rates for longer dated maturities. The yield on the 5-year note

rose above the 10-year yield, inverting that portion of the curve.

Market Extra: Why the Fed’s first rate hike since 2018 sent stocks and other markets on a wild ride

The spread between 2- and 10-year yields continued to narrow early Thursday, with the 10-year yield trading around just 20 basis points above the 2-year, near the flattest since March 2020. Inversions of that measure of the curve are often seen as precursors of recession. Analysts have warned that the Fed’s aggressive rate-hiking plans could lead to an inversion in coming months.

Also read: Treasury yield curve risks inverting relatively early after start of Fed rate hike cycle, warns Deutsche Bank

The Bank of England was expected Thursday morning to deliver a third consecutive rate increase as it also attempts to rein in inflation.

Investors continue to monitor developments in the Russia-Ukraine war. Overall investor appetite for risk was boosted Wednesday on signs of progress toward a potential cease-fire in talks between Russian and Ukraine officials.

But fighting remains intense as Russian forces continued to bombard Ukrainian cities. Russian forces destroyed a theater in Mariupol that sheltered hundreds of people, Ukrainian authorities said.

Weekly data on U.S. jobless benefit claims are due at 8:30 a.m. Eastern, with first-time applications for benefits expected to fall to 220,000 in the week ended March 12, versus 227,000 the previous week.

Data on February housing starts and building permits are also due at 8:30 a.m., along with the Philadelphia Fed’s March manufacturing index. February industrial production and capacity utilization figures are set for 9:15 a.m.

What are analysts saying?

“Considering the very hawkish FOMC meeting, yesterday’s market reaction was not particularly impressive, indicating that investors were already pricing in a rather aggressive hiking cycle,” wrote analysts at UniCredit Bank, in a note.

“Risks are now tilted to a more hawkish Fed, given that Fed Chair Powell highlighted the importance of price stability. This could drive UST yields higher, especially at the short end of the curve,” they said. “In any case, given the extremely uncertain inflation outlook, interest rate projections for next year and 2024 might be revised again in the future.”

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