Bond yields rose on Thursday as calmer conditions prevailed in fixed income markets ahead of next week’s expected rate rise by the Federal Reserve.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.819%
added by 2.1 basis points to 4.802%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.791%
rose 2.8 basis points to 3.783%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.859%
fell 2.1 basis points to 3.864%.
What’s driving markets
With the Federal Reserve in purdah ahead of next week’s interest rate decision, traders can concentrate more on data for clues to the central bank’s likely policy trajectory.
U.S. economic updates set for release on Thursday include the weekly initial jobless claims and the Philadelphia Fed manufacturing survey for June, both at 8:30 a.m. Eastern. The June existing home sales and leading economic indicators will be released at 10 a.m.
Markets are pricing in a 99.8% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25% to 5.50% after its meeting on July 26, according to the CME FedWatch tool.
Such certainty has helped the ICE BofAML MOVE index, a gauge of expected Treasury market volatility, to trade at 107, near its lowest this year and well off the 200 level witnessed at the time of the U.S. regional banking crisis in March.
The chances of a further 25 basis point hike to 5.5% to 5.75% in September is priced at 14%, and in November at 29%.
The central bank is not expected to take its Fed funds rate target back down to around 5% until April 2024, according to 30-day Fed Funds futures.
The Treasury will sell $17 billion of 10-year TIPS at 1 p.m.
What are analysts saying
The economics team at Bank of America have looked ahead to what they reckon Fed Chair Jerome Powell will say after hiking rates next week.
“We think the Chair will deliver four main messages in the press conference. First, the committee will do what’s necessary to return inflation to 2% over time. Second, in bringing inflation down, the committee would prefer to avoid imposing undue harm to the economy. Slowing the pace of policy rate actions allows for fine tuning of the policy stance,” said Bank of America.
“Third, we think the Chair will not rule out further action, pointing to the June projections that indicated most members expected more than one hike before year-end would be appropriate. This would align with the guidance in the FOMC statement. Finally, we don’t think the Fed wants to be boxed in one way or another; we expect Powell to say that whether additional policy rate firming happens, and when it happens, will remain data dependent.”
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