September 28, 2022

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Treasury yields rise sharply as investors digest the Fed rate increase

Treasury yields rise sharply as investors digest the Fed rate increase

US government bond yields rose sharply on Wednesday after the Federal Reserve said it would. Short-term interest rate hike They noted that they could reach close to 2% by the end of the year.

In recent trading, the yield on the US 10-year Treasury was 2.239%, according to Tradeweb, compared to 2.160% on Tuesday. The two-year Treasury yield – which is particularly sensitive to changes in monetary policy – was recently 1.989%, up from 1.855% on Tuesday.

Yields, which are rising as bond prices fall, drifted higher earlier in the session but added to those gains soon after. The Federal Reserve issued its latest policy statement, which stated that the central bank would raise the benchmark federal funds rate by a quarter of a percentage point to a range between 0.25% and 0.5% from near zero. Forecasts for interest rates showed that officials believe rates could rise to nearly 1.9% by the end of 2022 and 2.8% by the end of next year.

The Fed’s main tool for managing the economy is changing the federal funds rate, which can affect not only borrowing costs for consumers but also shape broader decisions by businesses such as how many people to hire. The Wall Street Journal explains how the Fed is manipulating this one rate to steer the entire economy. Illustration: Jacob Reynolds

As Wednesday approaches, yields have skyrocketed in recent sessions to their highest levels since 2019 as investors prepare for it A new regime for tighter monetary policies.

This year has been tough for bond investors. When inflation began to accelerate last year, investors believed for months that it could calm down on its own, allowing the Federal Reserve to keep short-term interest rates near zero. Despite this, those views have changed rapidly this year due to a shift in tone from Federal Reserve officials, who are beginning to express more concern. about inflation He was keen to start raising interest rates.

The first significant bond rise of the year came at the end of February when Russia was in first place invaded ukrainewhich casts uncertainty about the economic outlook.

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Lately, though, investors have become more skeptical that the invasion could curb interest rates. Some have argued that Rising commodity prices Driven by the invasion could drive up inflation, putting more pressure on the Fed to tighten policy. Meanwhile, energy prices I already went down from their recent highs, fueled in part by hopes of a negotiated settlement between Russia and Ukraine. This eased the concerns of those who believed that higher prices could have the opposite effect: slowing economic growth and making it difficult for the Federal Reserve to raise interest rates.

Wednesday’s Fed was seen as almost certain to raise its goal Overnight interbank rates increased by a quarter of a percentage point to between 0.25% and 0.5%. As a result, investors are focusing primarily on the Federal Reserve’s so-called dot plot, which shows where individual officials expect prices to head over the next few years. They will also gauge the general tone of Fed Chairman Jerome Powell’s press conference, looking to see if officials are becoming more concerned about inflation.

No matter what officials say on Wednesday, monetary policies – and therefore bond yields – will still be determined largely by the state of the economy.

On this front, new data on Wednesday morning showed that retail sales up 0.3% seasonally adjusted In February, it fell short of analysts’ expectations for a 0.4% increase. At the same time, January sales were revised up to 4.9% from 3.8%.

Treasury yields were not much changed after the report. In a note to clients, Ian Lyngen, head of US price strategy at BMO Capital Markets, wrote that the data showed a “disturbing trajectory” but that upward revisions to January sales “removed the advantage of the disappointing February numbers.”

write to Sam Goldfarb at [email protected]

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