Treasury Yields Hold Near 16-year Highs Ahead of the Fed Midweek Decision

Bond yields experienced an upward trajectory on Monday, driven by the assimilation of recent, robust economic data that exceeded market expectations. Investors also shifted their focus towards the impending policy decision and subsequent comments from the Federal Reserve, scheduled for midweek.

‍

Here are the notable developments:

• The yield on the 2-year Treasury (BX:TMBMKSE-02Y) saw a 2.5 basis point increase, reaching 5.062%. It's essential to note that yields move inversely to prices.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) edged up by nearly 1 basis point to 4.341%.
• The yield on the 30-year Treasury (BX:TMUBMUSD30Y) also climbed by 1 basis point, reaching 4.430%.

‍

The primary catalysts behind these market movements stem from a series of stronger-than-expected economic indicators in the United States. These include persistent inflation figures and robust retail sales, in addition to the influence of rising oil prices. These factors have collectively propelled 10-year Treasury yields towards levels not witnessed since the aftermath of the global financial crisis.

‍

Market participants are closely monitoring the Federal Reserve's response to these developments as they await the conclusion of the central bank's policy meeting on Wednesday, followed by a press conference featuring Chair Jay Powell.

‍

According to the CME FedWatch tool, current market pricing suggests a 99% probability that the Federal Reserve will maintain interest rates at their existing range of 5.25% to 5.50% during the upcoming meeting on September 20. The likelihood of a 25 basis point rate hike, pushing the range to 5.50% to 5.75%, at the subsequent meeting in November stands at just 31%.

‍

Market sentiment anticipates that the central bank will not return its Fed funds rate target to approximately 5% until September 2024, as indicated by 30-day Fed Funds futures. This is a notable shift from prior expectations, which suggested reaching this level by June.

‍

In terms of economic updates for the day, the September home builder confidence index is set to be released at 10 a.m. Eastern time.

‍

Across the Atlantic, U.K. 10-year government bond yields (BX:TMBMKGB-10Y) increased by 2.3 basis points to 4.384%. This occurred in anticipation of forthcoming consumer price data scheduled for Wednesday and the Bank of England's policy decision on Thursday. Many analysts expect the Bank of England to implement a 25 basis point interest rate hike, bringing it to 5.5%.

‍

Lastly, on the global front, the Bank of Japan is expected to maintain its current stance on Friday, although market participants will be attentive to any indications regarding the timeline for exiting its negative interest rate policy.

‍