News

Bond Yields Slightly Higher as Investors Await Fed Decision

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4.7

Andrew R. Michaud

• September 19, 2023

The bond market saw a small increase in yields early Tuesday, as investors remained cautious ahead of the Federal Reserve's policy decision expected later this week.

Key Points:

• The yield on the 2-year Treasury rose by 2.1 basis points to 5.062%. It's important to note that yields move in the opposite direction to prices.
• The yield on the 10-year Treasury increased by 1 basis point to 4.319%.
• The yield on the 30-year Treasury climbed by 1 basis point to 4.399%.

Market Analysis:

Traders are showing little activity as benchmark bond yields remain steady, hovering just below their highest levels in 16 years. This cautious stance comes in anticipation of the Federal Reserve's upcoming policy decision.

Over the past few weeks, rising oil prices, reaching a 10-month high, and stronger-than-expected economic data have sparked concerns about a potential increase in inflationary pressures.

According to the CME FedWatch tool, market expectations indicate a 99% probability that the Fed will maintain interest rates within the range of 5.25% to 5.50% after the next meeting on September 20.

Furthermore, the chances of a rate hike by 25 basis points, bringing the range to 5.50% to 5.75%, at the following meeting in November have decreased from 41% to 31% over the past week.

The Central Bank's Rate Outlook

According to 30-day Fed Funds futures, the central bank is not expected to decrease its Fed funds rate target to around 5% until August 2024.

U.S. Economic Updates

On Tuesday, there will be significant updates on the U.S. economy, including housing starts and building permits for August. The release is scheduled for 8:30 a.m. Eastern time.

Treasury Bond Auction

The Treasury will hold an auction for $13 billion worth of 20-year bonds on Tuesday.

Analyst Perspectives

Analysts are closely watching the Fed's Summary of Economic Projections (SEP) and the dot plot of expected interest rates, which are set to be released on Wednesday.

Alex Pelle, U.S. economist at Mizuho, notes that there is a significant divergence between the market's expectations and the Fed's projections. While markets anticipate the Fed to return its policy rate to the 3.75-4.00% range over time, the latest dot plot shows the Fed's expectation of lowering rates to 3.25-3.50% by year-end 2025 and further down to 2.5% in the long run.

Pelle also highlights that the market is still sensitive to upside growth and inflation risks. Given the current Treasury supply conditions, any prematurely dovish tone in the SEP or post-meeting press conference could potentially lead to a further increase in long-term rates.