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U.S. bond yields rose on Thursday as investors continued to assess the prospects for Federal Reserve policy following Wednesday’s interest rate hike.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.963%
rose by 5.4 basis points to 3.988%. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.476%
climbed 4 basis points to 3.485%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.688%
added 2.5 basis points to 3.680%.
What’s driving markets
A calmer mood descended on bond markets as investors continued to absorb the prospects for monetary policy after the Federal Reserve raised its policy interest rate by 25 basis points on Wednesday, but indicated it may be nearing the end of its monetary tightening cycle given stresses in the banking sector may crimp credit.
Read: Powell says no rate cuts in 2023, but the bond market doesn’t agree
Markets are pricing in only a 35% probability that the Fed will raise interest rates by another 25 basis points to a range of 5.0% to 5.25% after its meeting on May 3rd, according to the CME FedWatch tool. There is a 66% chance it will stand pat.
The central bank is expected to take its Fed funds rate target to 4.9% by June 2023, according to 30-day Fed Funds futures, but to reduce it to 4.2% by the end of the year.
However, in his press conference on Thursday, Fed Chair Jay Powell said: such “Rate cuts are not in our base case.”
U.S. economic updates set for release on Thursday include the weekly initial jobless claims report and the fourth-quarter U.S. current account numbers, both due at 8:30 a.m. The February new home sales report will be published at 10 a.m.. All times Eastern.
U.K. 10-year gilt yields
TMBMKGB-10Y,
were barely changed at 3.452% ahead of the Bank of England’s monetary policy decision due at 12 noon GMT (8 a.m. Eastern). The BoE is expected to raise rates by 25 basis points to 4.25% following data this week showing inflation had picked up again to 10.4% in February.
What are analysts saying
“The overarching message from the [Fed] meeting was that the evolution and impact of banking sector turmoil will be a key determinant of how much further the Fed needs to tighten”, said the U.S. economics team at Deutsche Bank led by Matthew Luzzetti. “Chair Powell made clear that the Fed anticipates that a tightening of credit conditions most likely will weigh on the economy and substitute for some additional rate hikes.”
“[W]e maintain a terminal rate view of 5.1% delivered with one more 25bp rate hike in May. There is elevated uncertainty around this expectation. If financial and credit conditions deteriorate quicker than anticipated and/or disinflation proceeds faster than expected, the Fed could pause their tightening cycle.”
“Conversely, if the anticipated tightening from credit conditions does not materialize, and/or inflation continues to surprise to the upside, the Fed will have to raise rates to a higher level to achieve a policy stance that is ‘sufficiently restrictive’,” Luzzetti added.
