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U.S. bond yields were slightly higher on Tuesday in cautious trading ahead of next week’s Federal Reserve policy meeting.
What happened
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.499%
gained 4.3 basis points to 4.523% versus 4.480% at 3 p.m. Eastern on Monday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.674%
rose less than 1 basis point to 3.699%, compared with 3.691% late Monday. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.848%
declined 1.6 basis points to 3.874%, compared with 3.890% Monday.
What drove markets
There were no U.S. economic data releases of note on Tuesday and no comments due from Federal Reserve officials during the usual so-called media blackout ahead of the next monetary policy meeting on June 14.
Markets are pricing in a 79.9% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.
However, chances of a 25 basis point hike to 5.25% to 5.50% is in July is priced at 52.7%.
These probabilities are little changed from the start of the week and this is reflected in meagre moves in yields across U.S. bond maturities.
Meanwhile, the 1-month Treasury yield
TMUBMUSD01M,
dropped 14 basis points to 5.052%, and the 3-month yield
TMUBMUSD03M,
declined 5 basis points to 5.270% on Tuesday. Both jumped in the past three weeks as did bills maturing around the “X-date,” or default date on June 5, which was averted by Congress raising the debt ceiling last week.
What analysts said
Morgan Stanley produced some thoughts on what it expects from next week’s Federal Open Market Committee meeting:
“Regarding current conditions, we expect the FOMC statement to acknowledge some slowdown in economic activity (in line with the spirit of the Beige Book, which described activity as “little changed” but with two districts with moderate declines). Elsewhere we expect little change in current conditions, e.g. inflation remains elevated, and job gains continue to be robust,” said the MS team led by Ellen Zentner, chief U.S. Economist,
“For the press conference: We expect the Chair’s press conference to be heavily focused on communicating that the Fed will be on hold for an extended period of time. The Chair will also likely emphasize that the FOMC stands ready to increase rates further if economic activity and inflation are not to come in line with the Fed’s expectations for more moderation. We would also expect the Chair to acknowledge that the range of views in the Committee as to what would be the appropriate next step has widened,” MS concluded.
