Breadth divergence is a troubling sign for the stock market

Treasury yields tick higher ahead of expected Fed rate hike

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Treasury yields edged higher Wednesday as investors awaited an expected interest rate increase by the Federal Reserve.

What yields are doing
  • The 2-year Treasury note yield

    was at 3.057%, up from 3.041% at 3 p.m. Eastern on Tuesday.

  • The yield on the 10-year Treasury note

    rose to 2.80%, up from 2.786% Tuesday afternoon.

  • The 30-year Treasury bond yield

    was at 3.025% versus 3.008% late Tuesday.

What’s driving the market

The Federal Reserve concludes a two-day policy meeting Wednesday afternoon, with policy makers expected to lift the fed-funds rate by 75 basis points, or three-quarters of a percentage point, as it continues to tighten monetary policy in an effort to rein in inflation that has been running near a four-decade high.

See: Four things you will want to listen for at Wednesday’s Federal Reserve meeting

The Fed will issue a policy statement at 2 p.m., with Chair Jerome Powell scheduled to hold a news conference at 2:30 p.m.

The Fed’s efforts to curb inflation have sparked fears the economy could see a sharp slowdown or tip into recession, with investors pricing in the prospect of rate cuts in 2023. The 2-year yield remains solidly above the 10-year, an inversion of the yield curve that has proven to be a reliable recession warning flag.

Need to Know: The Fed will cut rates next year, says BofA. Here’s what will happen to Treasurys.

Market watchers expect Powell to face questions over recession fears and expectations for rate cuts to follow in 2023. Billionaire hedge-fund manager Bill Ackman on Tuesday said he expected Powell to show “hawkish resolve” and push back against investor expectations that the fed-funds rate is likely to peak near 3.4%.

Key Words: Here’s what Bill Ackman says Powell should tell traders about Fed rate-hike plans

Also read: Here’s the threat to markets if investors ignore ‘nontrivial’ stagflation risk

Data on U.S. June durable goods orders are due at 8:30 a.m. along with a report on June advance trade in goods. An index tracking June pending home sales is expected at 10 a.m.

What analysts say

“Money market forwards indicate the peak in the current cycle at between 3.25% and 3.5% in December (in line with our forecast) with two to three rate cuts in 2023, starting at the June meeting,” said economists at UniCredit, in a note. “Given the political and public pressure on central banks to fight inflation at any cost, it is hard to see Fed Chair Jerome Powell indicating an earlier dovish pivot during the press conference.”

“For the time being, the 2-10 yield curve, which just reached another cyclical low yesterday, is highly likely to remain inverted for some months to come, with a deeper inversion probable,” they wrote.

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