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Treasury yields move mostly lower Thursday, a day after the Federal Reserve unveiled a long-anticipated plan to begin tapering its monthly bond purchases and indicated it would remain patient about raising interest rates.
What are yields doing?
-
The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.564%
edged down to 1.572%, compared with 1.577% at 3 p.m. Eastern on Wednesday. -
The 2-year Treasury note yield
TMUBMUSD02Y,
0.434%
fell to 0.462% from 0.476% Wednesday afternoon. -
The 30-year Treasury bond yield
TMUBMUSD30Y,
2.004%
rose to 1.996%, up from 1.984% late Wednesday.
What’s driving the market?
The Fed at the conclusion of its Wednesday policy meeting said it would begin scaling back its monthly asset purchases later in November at a pace that would wind down the bond-buying program by the middle of next year. However, Fed Chairman Jerome Powell pushed back somewhat against rising market-based expectations the Fed would begin hiking interest rates next summer, but said it was possible the employment picture could sufficiently improve to meet the Fed’s criteria for raising rates by the second half of 2022.
The Fed statement and Powell at his press conference both reiterated an expectation that the inflation pressures will prove “transitory,” fading as supply-side bottlenecks resolve themselves, though Powell did say risks to the inflation outlook were skewed to the upside.
Analysts said the stance favoring employment over inflation was contributing Thursday to a flatter yield curve — a line plotting yields across all maturities. The yield curve has flattened sharply since late September, with the move driven by rising short-term yields, as investors penciled in more aggressive Fed interest rate increases next year.
Some investors argue curve flattening is likely to continue on rising worries over the growth outlook. Meanwhile, the stock market rose late Wednesday following the Fed announcement, with the S&P 500
SPX,
Dow Jones Industrial Average
DJIA,
Nasdaq Composite
COMP,
and the small-cap Russell 2000
COMP,
all ending at records.
On Thursday, U.S. economic data, particularly weekly jobs figures and the October employment report on Friday, will be closely tracked. Strong readings could boost expectations for the Fed to speed up the tapering process and to contemplate an earlier liftoff for interest rates.
See: Why the Fed’s long-awaited taper announcement isn’t rattling the stock market
The Bank of England on Thursday was expected to deliver an interest rate increase in response to rising inflation pressures. Norway’s central bank left its key interest rate at zero at Thursday’s monetary policy meeting, as expected, but said rate increases could begin much sooner than it previously projected.
Weekly U.S. data on jobless benefit claims are due at 8:30 a.m. Eastern. Data on the September international trade deficit and third-quarter productivity figures are set for release at the same time.
Friday brings the October jobs report from the Labor Department, with economists looking for payrolls to rise by 450,000 and the unemployment rate ticking down to 4.7% from 4.8%.
What are analysts saying?
“On markets, expectations for two rate hikes next year didn’t change. The Fed giving more weight to employment than to the inflation caused the U.S. curve to steepen mainly due to higher inflation expectations,” wrote analysts at KBC Bank in Brussels, in a note.
Investors “need to watch growth and inflation data very closely going forward, because if the data is hot the market will begin to price in a more hawkish Fed and sooner-than-expected rate hikes — that is absolutely something that will create serious volatility,” said Tom Essaye, founder of Sevens Report Research, in a Thursday note.
