Bond Yields Hold Near Four-month High as Fed Begins Meeting, Boj Hikes

U.S. government bond rates experienced a marginal decrease on Tuesday morning, following the Bank of Japan's initial interest rate hike in 17 years. Market focus has now shifted towards the upcoming policy announcement from the Federal Reserve.

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The yield on the 2-year Treasury note decreased by 3.5 basis points to 4.699% compared to Monday's 4.734%. According to data from Dow Jones Market Data at 3 p.m. Eastern time, Monday's rate was the highest since February 26.

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Similarly, the yield on the 10-year Treasury note dropped by 3.1 basis points to 4.308% from Monday's 4.339%, the highest level recorded since November 30. Meanwhile, the yield on the 30-year Treasury note declined by 2 basis points to 4.445% from Monday's 4.465%, marking the highest rate since February 21.

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The Federal Reserve commenced its two-day monetary-policy meeting on Tuesday, with market expectations leaning towards officials maintaining rates unchanged between 5.25% and 5.5% on Wednesday. However, there's a cautious sentiment regarding the possibility of adjustments to the median 2024 forecast for rates, given recent persistent inflation figures.

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The probability of the U.S. central bank reducing interest rates by at least 25 basis points by June now stands at 63.2%, a decline from 75.9% recorded a month earlier, as per the CME FedWatch Tool.

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On the economic front, data released on Tuesday revealed a 10.7% rebound in housing starts for February, reaching an annual pace of 1.52 million units, marking the most significant increase in nine months. Additionally, a $13 billion auction of 20-year bonds by the Treasury is scheduled for 1 p.m. Eastern time.

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Meanwhile, the market has seemingly absorbed the Bank of Japan's departure from negative interest rates, following its decision to raise borrowing costs for the first time since 2007.

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The Bank of Japan elevated its overnight interest rate from minus 0.1% to a range of zero to 0.1% and eliminated its yield-curve controls. It also announced the cessation of purchasing exchange-traded funds of Japanese equities and real estate investment trusts, while committing to continue buying about ¥6tn ($40bn) worth of Japanese government bonds monthly.

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Commenting on these developments, Ben Powell, an investment strategist at the BlackRock Investment Institute, described the Bank of Japan's move as a significant departure from an extended period of unconventional monetary policies aimed at combating Japan's deflationary or low inflationary environment and stagnant economic activity. Powell emphasized that the policy shift reflects a deliberate normalization process rather than an abrupt monetary tightening, citing robust wage growth as a pivotal factor influencing the decision.

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