Yields for government bonds pulled back modestly Monday morning to start the week, as investors watch a rout in global equities and await an important two-day meeting of the Federal Reserve, the first of the young year, is set to kick off Tuesday and Wednesday.
Rising global tensions and heightened volatility in stocks domestically and abroad, also are likely anchoring yields lower.
What are yields doing?
-
The 10-year Treasury note yielded
TMUBMUSD10Y,
1.717%
1.737%, down from 1.747% on Friday at 3 p.m. Eastern Time. Yields fall as prices for bonds rise. -
The 2-year Treasury note rate
TMUBMUSD02Y,
0.995%
was at 1.008%, versus 0.993% to end last week. -
The 30-year Treasury bond
TMUBMUSD30Y,
2.044% ,
known as the long bond, was yielding 2.048%, down from 2.062% on Friday.
What’s driving the market?
Fed policy makers are likely to use a two-day policy meeting that ends Wednesday to lay the groundwork for a shift away from an easy-money stance this year, without taking policy action.
While members of the rate-setting Federal Open Market Committee are likely to reaffirm investors’ expectations for an interest-rate increase in March, the first hike since December 2018, policy makers aren’t expected to tinker with policy rates, currently between 0% and 0.25%, for now or start shrinking their almost $8.9 trillion balance sheet until probably after June, following the end of their current bond buying program in March.
The FOMC, however, will set the tone for the coming months of prospective policy shifts, highlighting both the pace and intensity of tightening efforts to quell rising inflation pressures as global stocks buck lower.
Analysts at Goldman Sachs forecast four rate increases in 2022, but see a risk for more rate rises due to the surge in inflation.
Against that backdrop, yields for government debt, which are seen as having priced in a more aggressive Fed, could see swings. The 10-year Treasury, for example, last week, climbed more than 20 basis points to start the 2022, marking the biggest advance to a new year since 2009.
Meanwhile, the world seems awash with risks that might also be drawing haven demand and undercutting appetite for assets considered risky such as stocks.
The U.S. State Department over the weekend ordered the families of U.S. personnel to leave Ukraine, as concerns grow about a potential Russian invasion, with the U.S. threatening sanctions if Moscow invades its neighbor. And the United Arab Emirates said it intercepted two ballistic missiles targeting its capital, Abu Dhabi, with Houthi rebels blamed for brewing conflict in the region.
See: How a Russian invasion of Ukraine could trigger market shock waves
Later in the session, investors will be watching an auction of $54 billion in 2-year notes at 1 p.m. Eastern Time, which could be influential on trade.
In economic reports. the Chicago Fed National Activity Index is due at 8:30 a.m. Eastern, while flash purchasing managers index readings from Markit are due at 9:45 a.m.
What strategists are saying
- “Everyone is out with their Fed predictions, both in 2022 strategy pieces and ahead of the meeting this week. Most though are ‘all else equal’ analysis in response to the current high levels of inflation but we know historically there is always an equal and opposite reaction, for every action, as one of Newton’s laws say,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a Monday research note. “So bottom line and my 2 cent prediction, I think after ending [quantitative easing] and getting 50-75 bps of rate increases under their belt, the Fed will then see the economic and market reactions, and where the yield curve lies. Then, if the curve has flattened, they’ll start [quantitative tightening] in an attempt to steepen it. If the curve still steepens because the market doesn’t think they are tightening enough, they’ll do more hikes,” he wrote.
