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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-policy tightening.
What are yields doing?
-
The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.177%
fell to 2.164%, down from 2.185% at 3 p.m. Eastern on Wednesday. -
The 2-year Treasury note yield
TMUBMUSD02Y,
1.938%
was 1.939%, down from 1.956% Wednesday afternoon. -
The 30-year Treasury bond yield
TMUBMUSD30Y,
2.463%
stood at 2.44%, falling from 2.456% late Wednesday. - On Wednesday, the yields on the 10- and 2-year notes were the highest since May 30, 2019, based on 3 p.m. levels, 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
TMUBMUSD05Y,
also 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 hovered around 22 basis points early Thursday, with analysts warning that the Fed’s aggressive rate-hiking plans could lead to an inversion in coming months.
The Bank of England voted to lift interest rates for the third time since December on Thursday, responding to a surge in inflation well beyond its target.
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.
In U.S. data, new filings for unemployment benefits fell to a 2½-month low of 214,000 in mid-March, showing that demand for labor is still high as the U.S. economy recovers from the pandemic.
U.S. home builders started construction on homes at a seasonally-adjusted annual rate of roughly 1.77 million in February, a 6.8% increase from revised figures for the previous month. And the Philadelphia Fed’s manufacturing gauge showed strength in March, rising to 27.4 in March from 16 in the prior month.
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.”
