Treasury yields fall as investors focus on looming Fed policy update
U.S. government debt yields on Wednesday morning were slightly lower ahead of an announcement from the Federal Reserve that is expected to provide clarity on upcoming policy plans, which have been important drivers for markets in recent weeks.
What do yields do?
The 10-year Treasury bond TMUBMUSD10Y,
reports 1.773%, down from 1.784% Tuesday at 3 p.m. EST.
The 2-year Treasury note TMUBMUSD02Y,
the rate sits at 1.017%, down from 1.025% on Tuesday, based on new issuance levels.
The 30-year Treasury bond TMUBMUSD30Y,
yield 2.116%, against 2.129% Tuesday afternoon.
What is driving the market?
Federal Reserve officials are expected to signal that they are preparing to raise interest rates in mid-March, although they are not expected to announce an immediate rate change after their policy-setting meeting on Wednesday.
The Federal Open Market Committee, or FOMC, which sets rates, will release its policy statement at 2 p.m. Eastern Time, and Chairman Jerome Powell will host a press conference a half-hour later.
Read: Stock investors can’t rely on the ‘Fed put’ – why policymakers aren’t rushing to save
Minutes of the central bank’s December meeting, released earlier this month, surprised the market with the detail of the discussion of the central bank’s nearly $9 trillion balance sheet reduction. Those discussions are expected to continue this week and Powell will provide an update, but economists are not yet expecting details.
The Fed’s message regarding its inflation outlook, however, could be a key point for investors. Inflation has increased, as evidenced by consumer and wholesaler prices. The annual US inflation rate measured by the consumer price index reached 7% in December.
Most economists expect inflation to moderate closer to 4% by summer, but this is still much higher than the current target for the nominal fed funds rate, which is between 0 % and 0.25%.
Former Federal Reserve Governor Randal Quarles said on Tuesday he believes the Fed will move quickly to raise its key rate above the rate of inflation because that is the only way to beat inflation. .
The Fed’s median point projection of the likely path for interest rates, released last month, only raises the key central bank rate to 2.1% by the end of 2024.
In US economic reports, the US trade deficit in goods topped $1 trillion in 2021 for the first time ever, as Americans bought a record amount of imports such as toys, cellphones and appliances appliances. Meanwhile, new home sales jumped nearly 12% in December to an annual rate of 811,000 as supply dwindled as buyers grabbed whatever inventory they could find.
Looking ahead, investors will also be watching a $26 billion auction of two-year floating rate notes later on Wednesday.
What the strategists say
“March rate hikes are almost certain,” said Eve Lando, municipal bond portfolio manager at Thornburg Investment Management. “I predict a measured rate increase of 25 basis points at each of the next four meetings, and then we should reassess where we go from there.”
“The market likes predictability, so I want to hear Chairman Powell acknowledge that despite risks beyond our control such as geopolitical pressures and/or case spike data, the Fed will not change direction: cuts and hikes rates in the first half of 2022,” Lando wrote in an email.