U.S. bond yields were barely changed on Tuesday, as a lack of fresh catalysts provided a period of contemplation ahead of next week’s interest rate decision by the Federal Reserve.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.166%
was barely changed at 3.166%. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
2.987%
rose less than 1 basis point to 2.989%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.157%
added less than 1 basis point to 3.165%.
What’s driving markets
The Federal Reserve is in its media blackout period ahead of its FOMC meeting next week, and with only some housing starts and building permit data due before the markets open, traders are reluctant to place any fresh big bets.
After some fierce volatility last week, when a 41-year high U.S. inflation reading prompted investors to price in an imminent full percentage point rate hike in borrowing costs by the Fed, action has settled down.
Markets are now suggesting just a 36% probability that the Fed will raise interest rates by 100 basis points to a range of 2.50% to 2.75% after its meeting on July 27. The chances of another 75 basis point move are 64%. The central bank is expected to take its borrowing costs to 3.52% by February 2023, according to Fed Funds futures.
Analysts at Deutsche Bank noted that previous Fed rate hikes were already being felt by consumers. “With the Fed widely expected to raise rates by 75bps again next week, the latest round of housing data provided further evidence that their tightening cycle is beginning to have a significant impact, with the NAHB housing market index plummeting to 55 in July (vs. 65 expected),” said Deutsche.
“That’s the worst reading for the index since the initial wave of the Covid pandemic in May 2020, and if you exclude the pandemic plunge, you’ve got to go back to early 2015 for the last time that sentiment was worse,” the bank added.
Meanwhile, Europe took the spotlight after reports that the European Central Bank was considering a possible 50 basis point increase in borrowing costs on Thursday, to tackle record eurozone inflation of 8.6%.
Until now investors had considered just a 25 basis point hike was likely, taking the policy rate to minus 0.25%. And the possible acceleration of ECB monetary tightening speaks to the concern in the market that central banks will need to become more hawkish as they struggle to contain rampant price rises.
The policy-sensitive 2-year German bond yield
TMBMKDE-02Y,
jumped 8.1 basis points 0.589% and the euro
EURUSD,
which last week hit a 20-year low below parity with the dollar, surged 0.9% to $1.0233.
