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Rates on 10-year Treasury notes and 30-year bonds fell Wednesday morning, flattening the yield curve, as investors awaited the outcome of a Federal Reserve meeting that’s expected to produce a plan for tapering monthly asset purchases and clues to the timing of eventual interest-rate increases.
What are yields doing?
-
The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.534%
was 1.526%, compared with 1.546% at 3 p.m. Eastern on Tuesday. Yields and debt prices move in opposite directions. -
The 2-year Treasury yield
TMUBMUSD02Y,
0.454%
edged up to 0.458%, compared with 0.454% on Tuesday afternoon. The 2-year note saw its biggest one-day fall since March 23, 2020, on Tuesday, a day after ending at a 19-month high. -
The 30-year Treasury bond yield
TMUBMUSD30Y,
1.941%
edged down to 1.937% versus 1.958% on Tuesday afternoon.
What’s driving the market?
The Federal Reserve is fully expected to lay out its schedule for scaling back and eventually ending its monthly asset purchases. Investors will be focused on whether Fed Chairman Jerome Powell pushes back on growing speculation that the end of the tapering process, expected in mid-2020, will be quickly followed by rate increases.
Read: Fed seen announcing start of a ‘taper’ of bond purchases this week
Relatedly, investors will be closely watching for any changes in the Fed’s assessment of inflation pressures, which officials have largely insisted would be transitory. The yield curve — a line plotting yields across maturities — has flattened significantly amid rising short-term rates since late September as investors began to price in a more aggressive than previously expected policy response from the Fed and other major central banks in response to persistent inflation pressures.
See: 5 things to watch for when Fed meets Wednesday
The Fed will release its policy statement at 2 p.m. Eastern, followed by Powell’s news conference at 2:30 p.m.
Ahead of that, the ADP estimate of private-sector payroll growth for October is due at 8:15 a.m. The figures will be watched for clues to Friday’s October jobs report, though the relationship between the ADP data and official numbers isn’t particularly strong.
IHS Market’s October services-sector purchasing managers index is due at 9:45 a.m. The Institute for Supply Management will release its closely watched index of services activity at 10 a.m. Separately, September factory orders are also set for release at 10.
What are analysts saying?
“[W]e think Powell will go to great lengths to drive home (as he did at the last FOMC meeting) that while the conditions for taper have been met, the conditions for [rates] liftoff have not,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets, in a note. “Of course, as our ’22 growth/inflation forecasts highlight, we certainly believe conditions will be met for a hike next year — the open question is how many hikes.”
“The September postmeeting statement stated that, ‘Inflation is elevated, largely reflecting transitory factors.’ We expect the statement to keep this wording, particularly given the recent upside news to inflation is largely driven by energy prices,” wrote analysts at UniCredit. “But Chair Powell is likely to acknowledge that inflation is expected to move up and stay higher for longer than the Fed initially anticipated, and that uncertainty over the inflation outlook is high.”
