Treasury yields renew rise after Fed rate hike

2-year Treasury yield hits 2-week high as investors factor in another half-point Fed rate hike for September
Spread the love

U.S. Treasurys saw renewed selling Thursday, pushing up yields as investors assess an interest rate hike by the Federal Reserve on Wednesday and monetary tightening by other central banks in an effort to rein in persistently hot inflation.

What yields are doing
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.480%
    was at 3.44%, up from 3.389% at 3 p.m. Eastern on Wednesday.

  • The 2-year Treasury note yield
    TMUBMUSD02Y,
    3.395%
    rose to 3.358%, up from 3.275% Wednesday afternoon.

  • The yield on the 30-year Treasury bond
    TMUBMUSD30Y,
    3.486%
    was 3.437% versus 3.404% late Wednesday.

What’s driving the market

Yields initially fell back Wednesday after the Fed raised its benchmark rate by 75 basis points, or three-quarters of a percentage point, for its largest rise since 1994. Fed Chair Jerome Powell said a 75 or 50 basis point move was likely in July but that 75 basis point moves weren’t likely to become the norm.

Powell said it wasn’t the Fed’s intention to cause a recession, but warned that the path to a so-called soft landing was becoming more difficult due to factors over which central banks have little control, such as the impact of the war in Ukraine on commodity prices and supply-chain issues caused by Covid lockdowns in China.

“Many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not,” he said.

See: As Fed aggressively raises rates, here are 4 takeaways from Jerome Powell’s press conference

Selling pressure on both Treasurys and stocks initially relented Wednesday in the wake of the Fed move, with the Dow Jones Industrial Average
DJIA,
+1.00%
and S&P 500
SPX,
+1.46%
snapping a bruising five-day losing streak. Equities were back under pressure alongside government bonds on Thursday though.

Other central banks also remain in tightening mode. The Swiss National Bank lifted its base rate by a half point, to negative 0.25%, while the Bank of England delivered a quarter-point hike on Thursday.

European government bond yields were also up sharply, with the yield on the 10-year German bund
TMBMKDE-10Y,
1.909%
up 16 basis points near 1.81%. Yield spreads between highly indebted eurozone countries and Germany continued to narrow, however, a day after the European Central Bank, after holding an emergency meeting, said it would use proceeds from expiring bonds it purchased under its former pandemic emergency purchase program, or PEPP, to help keep the yields of so-called peripheral countries from spiraling higher. The ECB also said it would begin work on an antifragmentation tool.

Read: Why the ECB called an emergency meeting as it wrestles with ‘fragmentation’ risk

The premium demanded by investors to hold Italian
TMBMKIT-10Y,
3.924%
10-year bonds over their German counterpart fell by around 6 basis points Thursday, continuing to narrow after hitting a more-than-two-year high ahead of Wednesday’s emergency meeting.

In U.S. economic data, weekly data on jobless claims is due at 8:30 a.m., along with May figures on housing starts and building permits and the Philadelphia Federal Reserve’s June manufacturing index.

What analysts say

“Market pricing does now appear to be fully in line with the dot plot until 2024, rendering yesterday’s FOMC announcements as fully credible. Upcoming inflation data are likely to determine whether investors will lift their expectation in the coming weeks for the policy rate to be raised above 4%,” wrote economists at UniCreidt. “Growth indicators are likely to be too soft to trigger another bout of weakness in the [U.S. Treasury] market.”

Leave a Reply

Your email address will not be published. Required fields are marked *