This post was originally published on this site
Two-, 10- and 30-year Treasury yields pulled back on Wednesday from their highest levels since 2019, as investors digested updates on the Federal Reserve’s policy path and monitored developments in the Russia-Ukraine war.
Two Fed officials came out on Wednesday with remarks on the likelihood of a 50 basis point interest rate increase and an announcement on the reduction of the central bank’s balance sheet.
What are yields doing?
-
The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.337%
was at 2.351%, down from 2.375% at 3 p.m. Eastern on Tuesday. -
The 2-year Treasury yield
TMUBMUSD02Y,
2.133%
was at 2.13%, down from 2.152% Tuesday afternoon. -
The 30-year Treasury bond yield
TMUBMUSD30Y,
2.543%
was at 2.56%, down from 2.592% late Tuesday. - Based on 3 p.m. levels Tuesday, the 10- and 2-year notes were at their highest since May 2019, while the 30-year was at its highest since July 26, 2019.
What’s driving the market?
The aggressive selloff in Treasurys which drove yields substantially higher earlier in the week has taken a pause, even after two Federal Reserve officials came out on Wednesday with comments about the prospects of a larger-than-normal rate hike at the Fed’s next meeting.
San Francisco Fed President Mary Daly said “everything is on the table” for May, including a half-point rate increase and an announcement on shrinking the Fed’s $9 trillion balance sheet. Earlier in the day, her colleague, Cleveland Fed President Loretta Mester, said she presumes the Fed will need to do “some” 50 basis point rate hikes this year, and “markets can handle” a front-loading of rate hikes and a balance-sheet reduction at the same time.
Earlier this week, Fed Chairman Jerome Powell said policy makers were prepared to raise benchmark interest rates by more than 25 basis points, or a quarter of a percentage point, in future meetings if needed to rein in inflation. The move came after the Fed delivered a quarter-point hike last week and signaled expectations for a total of 10 to 11 similar-sized moves by the end of 2023.
The Treasury yield curve, a line measuring the differences between yields across maturities, has flattened significantly in recent months, with investors now looking for the 2-year yield to eventually move above the 10-year yield — a phenomenon that has preceded past recessions.
Read: The yield curve is speeding toward inversion — here’s what investors need to know
Investors are also watching the four-week war in Ukraine where Russia is increasingly bogged down in a costly and uncertain military campaign and is encircled by western sanctions that are biting hard on its economy and currency. U.S. President Joe Biden and U.S. allies plan to roll out further sanctions on Moscow this Thursday, according to Biden’s national security adviser, Jake Sullivan.
In U.S. economic data Wednesday, U.S. new-home sales decreased 2% to an annual rate of 772,000 in February.
What are analysts saying?
“A strong economy and unacceptably high inflation are building a consensus to front-load tightening and bring the policy rate to/above the neutral level,” wrote analysts at KBC Bank in Brussels.
