Bond yields rose on Thursday, as traders made more bets the Federal Reserve will sharply hike interest rates to dampen inflation running at its fastest pace in 41 years.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.206%
rose by 4.6 basis points to 3.199%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
2.969%
advanced 3.2 basis points to 2.969%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.130%
climbed less than 1 basis point to 3.122%. - Year-to-date the 2-year yield is up 245 basis points.
What’s driving markets
Fixed income traders are still trying to absorb the U.S. consumer prices data, released on Wednesday, and what that means for monetary policy. The reading of 9.1% per cent in June was higher than forecast and showed inflation at its fastest pace in 41 years.
Hopes that inflation had peaked in May were dashed, and the market responded by predicting the Federal Reserve will need to become more aggressive with its interest rate hikes and that it will therefore complete its tightening cycle sooner.
Markets are pricing in an 85% probability that the Fed will raise interest rates by 100 basis points to a range of 2.25% to 2.5% after its meeting on July 27. Before the inflation report was released the chances of a full percentage point hike stood at about 3%.
The central bank is expected to take its borrowing costs to 3.7% by January 2023, according to Fed Funds futures. Before the report it was forecast that the “terminal rate” would occur in April.
“The Fed’s guidance in June was that the July decision would be between 50bp and 75bp. The problem is that the Fed had guided to 50bp for June and then went 75bp instead. So guidance doesn’t seem to be worth the paper it’s written on,” said Stephen Innes, managing partner at SPI Asset Management.
Such uncertainty among investors was reflected in the MOVE index, a gauge of expected Treasury market volatility, which was trading around 50 at the start of the year but on Thursday was 136.1.
“Rates volatility is increasing as investors are stuck trying to figure out the new normal for central bank policy. Not so long ago, it was 25 basis points, and now, as the Bank of Canada opted [on Wednesday] for 100 basis points in one go, no one seems to know,” Innes added.
Meanwhile, concerns are building that the Fed’s tightening could push the U.S. economy into recession. The 10-year to 2-year spread of minus 23 basis points means the yield is at its most inverted since 2000, signalling a looming economic downturn.
U.S. producer prices data are set for release at 8.30 a.m. Eastern.
