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Treasury yields rose on Monday as investors absorbed recent stronger-than-expected economic data and looked ahead to the Federal Reserve’s policy decision in two days.
What’s happening
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The yield on the 2-year Treasury
BX:TMBMKSE-02Y
gained 2.8 basis points to 5.058% from 5.030% on Friday. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 2.3 basis points to 4.344% from 4.321% Friday afternoon. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
climbed less than 1 basis point to 4.417% from 4.410% late Friday.
What’s driving markets
Generally stronger-than-expected U.S. economic data last week — including stubborn inflation readings and sturdy retail sales — have combined with rising oil prices
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to push the 10-year Treasury yield back toward its highest levels since the 2007-2008 financial crisis.
Traders will be keen to see to what degree these developments are impacting Federal Reserve thinking when the central bank concludes its policy meeting on Wednesday, and Chairman Jerome Powell holds a press conference shortly after.
Markets are pricing in a 99% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.50% on Wednesday, according to the CME FedWatch Tool. The chance of a 25 basis point rate hike to a range of 5.50%-5.75% at the subsequent meeting in November is priced at just 28.7%.
In U.S. economic updates on Monday, a home builders’ sentiment index fell in September to below breakeven level.
U.K. 10-year government bond yields
BX:TMBMKGB-10Y
rose 4 basis points to 4.401% ahead of consumer prices data on Wednesday and the Bank of England’s policy decision Thursday. The BoE is expected by many analysts to raise interest rates again by 25 basis points to 5.5%.
Read: Goldman Sachs lowers peak U.K. interest-rate forecast ahead of meeting
The Bank of Japan is forecast to stand pat on Friday, though traders will be sensitive to any mention of the timescale for exiting its negative-rate stance.
What analysts are saying
“We expect the Fed to maintain the target range for the federal funds rate at 5.25-5.5% at the September FOMC meeting. This outcome would be consistent with both recent Fed communications and current market pricing. We expect no change to the Fed’s balance sheet policies,” said Michael Gapen, Mark Cabana and Alex Cohen of BofA Securities.
“Investors will likely be focused on the Summary of Economic Projections (SEP), which will be released along with the FOMC statement,” they wrote in a note. “We expect the 2023 median policy rate forecast to show one more 25bp hike, for a terminal rate of 5.5-5.75%. Perhaps the most important forecast is the 2024 median, which in our view will shift up by 25bp to 4.875%, reflecting just 75bp of cuts next year.”
