Long-dated Treasury yields rose, and prices fell, early Wednesday as investors awaited a key update on monetary policy from the Federal Reserve, which is likely to influence coming trade.
Wall Street traders also were watching the narrowing spread between the 2-year and 10-year Treasury note, which is often looked at as a gauge of investors’ dimming outlook for the economy, but that is also a typical feature of a rising-rate environment.
Check out: As market churns, Fed will say it has inflation situation under control
How are Treasurys performing?
The 2-year note yield
TMUBMUSD02Y, -0.32%
sensitive to shifting expectations for monetary policy, was little changed at 2.513%, holding at its highest level since Aug. 2008, a level put in late Tuesday in New York.
The 10-year Treasury note yield
TMUBMUSD10Y, +0.10%
added 1.4 basis points to 2.990%, while the 30-year bond yield
TMUBMUSD30Y, +0.11%
climbed by 2 basis points to 3.156%, according to WSJ Market Data Group.
Bond prices move in the opposite direction of yields.
The gap between the 2-year and 10-year Treasury, referred to as the yield curve, was at 47.7 percentage points early Wednesday.
Concerns that the so-called yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping investors on edge. An inverted yield curve has often preceded a recession.
What’s driving the market?
Although the Federal Reserve isn’t expected to announce an increase in key interest rates at the conclusion of its policy convention at 2 p.m. Eastern Time, the central bank will be closely watched for clues on its outlook for inflation and the economy.
The Fed’s preferred inflation gauge, the personal-consumption expenditure price index, rose to a 12-month rate of 2%, hitting its annual target for the first time in a year and raising concerns that policy makers may be forced to increase rates at a faster clip than the two or three additional increases anticipated in 2018 to tamp down runaway price climbs. Rising inflation is bad for bonds because it chips away at its fixed payments, while higher rates undercut demand for existing government debt, pushing yields up, as market participants anticipate richer yielding debt in the future.
Read: PCE could be prelude to faster rise in U.S. interest rates
Analysts also expect the Fed, now run by Chairman Jerome Powell, to express the view that interest rates remain accommodative for now and that risks are roughly balanced.
The policy-setting Federal Open Market Committee lifted fed-funds futures rates in March and targeted two more hikes this year. The market is now on board and is pushing yields higher. Many investors think the Fed will ultimately move rates up three more times this year. The market has priced in over 40% chance of such an outcome.
U.S. government bond rates also have climbed as investors have expected greater issuance amid an expanding federal budget deficit.
On Wednesday, the Treasury Department is scheduled to release its update to the government’s refunding plan, which is likely to provide details about coming debt offerings, with additional debt issuance expected to weigh on prices and push yields up.
Meanwhile, global trade discussions, which could also becoming a factor for rising prices, were in focus as delegation, including Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer, was set to go to Beijing to discuss softening trade tensions between China and the U.S.
Bond investors have feared that talk of tariffs and tit-for-tat moves between the world’s largest economies could disrupt the market and put pressure on Treasurys because Beijing is a big holder of U.S. paper. However, at the Milken Institute’s annual conference on Tuesday, Mnuchin emphasized that he wasn’t worried about China selling U.S. debt as retaliation in a trade war, adding that the U.S. had plenty of buyers for its government paper.
What are strategists saying
“Focus in the rates markets will be on the Fed decision as well as on the Treasury’s quarterly refunding announcement. On the Fed, market expectations are right in between three and four additional rate hikes in the current cycle,” wrote analysts at UniCredit in a Wednesday research note.
“Our reading is that market participants anticipate a broadly unchanged FOMC verdict today—with a small risk that the wording may be tilted to the hawkish side. It seems as if a relatively hawkish Fed is already priced in at the front end of the US Treasury curve.”
Which data are ahead?
ADP’s April release on private-sector employment is expected to arrive at 8:15 a.m., ahead of a more closely watched nonfarm-payrolls report due Friday.
Source : MTV
