Bond yields rose on Thursday ahead of an expected sharp rate hike by the European Central Bank.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.457%
climbed 2.9 basis points to 4.449%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
4.080%
rose 6.1 basis points to 4.067%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
4.205%
gained 4.6 basis points to 4.189%.
What’s driving markets
Bonds are under pressure, pushing up yields, as a looming rate hike from the European Central Bank reinforces the trend for tighter monetary policy across developed economies as they battle multi-decade high inflation.
Yields had eased on Wednesday after the Bank of Canada (BoC) delivered a lower-than-expected 50 basis point rate increase, with bond bulls hoping it signalled the beginning of the end for the global tightening cycle.
However, the ECB, which admittedly started tightening later than many of its peers, is expected on Thursday to hike borrowing costs by 75 basis points to 1.5%. And investors will be keen to hear whether the central bank outlines how it may reduce its 8.8 trillion euro ($8.8 trillion) balance sheet.
Still, Brian Daingerfield, head of G10 FX strategy at NatWest Markets, thinks traders should continue to focus on the U.S. Federal Reserve.
“I think there is a limit on how much tea reading the market should read, both from the BoC and from prior pivot moves from other central banks….In truth, the reaction function likely goes the other way – the Fed sets the pace and the rest of the world’s central banks have to react around it, rather than the other way,” said Daingerfield in a note.
Markets are pricing in a 87.5% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4.00% after its meeting on November 2nd. The central bank is expected to take its Fed funds rate target to 4.9% by May 2023, according to the CME FedWatch tool.
The next couple of days will provide the Fed with a flurry of data to color its thinking before its decision next week. U.S. economic updates set for release on Thursday include the first estimate of third quarter GDP, weekly initial jobless claims, and durable goods and capital equipment orders for September, all due at 8:30 a.m. Eastern.
Then on Friday, arguably the most important is the bunch of personal consumption expenditure, or PCE, figures for September, due at 8:30 a.m. Eastern. At the same time the employment cost index for the third quarter will be published and the September real disposable income and real consumer spending reports.
