Longer-dated U.S. Treasury yields held mostly steady on Tuesday, hovering near two-months lows after the minutes from the Federal Reserve’s recent rate-setting meeting showed that policymakers all agreed that monetary policy will need to remain restrictive amid concerns about persistent inflation.
What happened
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
was losing 2.8 basis points, at 4.881%. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
was declining less than 1 basis point, to 4.417%. That was the lowest yield since September 20, according to Dow Jones Market Data. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
was rising 0.5 basis point to 4.579%, snapping a three-day streak of falling yields, according to Dow Jones Market Data.
What drove markets
Minutes of the Federal Reserve’s November policy meeting showed Fed officials remained concerned that the strong U.S. economy would cause inflation to reaccelerate. They all agreed that monetary policy must remain in a restrictive stance “for some time” until inflation is clearly moving toward their 2% goal, according to minutes released Tuesday afternoon.
See: ‘Most’ Fed officials continue to worry about reacceleration of inflation, minutes show
“The committee seems to be in a ‘wait and see’ mode, willing to be patient as more data helps clarify the inflation trajectory,” wrote Jeffrey J. Roach, chief economist at LPL Research, in emailed commentary.
“Markets should expect Powell and other committee members to remain hawkish in tone, but that does not necessarily imply the Fed will hike further. Markets expect the next move to be a rate cut by mid-2024,” Roach said.
Traders were still pricing in a 94.8% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th, and the subsequent meeting on Jan. 31, according to the CME FedWatch tool.
Meanwhile, the chance of a 25-basis-point rate cut by May was seen at around 46%, up from 30% a month ago.
See: Central banks are cutting interest rates at fastest clip in years. When will the Fed join them?
After recent data showed easing U.S. inflation and a cooling jobs market, investors believe the Fed is now very unlikely to raise interest rates again, and that has helped push the 10-year Treasury yield down from a 16-year high above 5%, touched last month, to a two-month trough below 4.5%, according to Dow Jones Market Data.
Also helping the bond rally was a well-received auction of 20-year U.S. government bonds on Monday, which calmed fears after a poor sale of long bonds a few weeks ago meant foreign buyers were shunning U.S. paper.
“The favorable response to the 20-year bond auction might indicate that the issues experienced with the 30-year sale were, to some extent, a misleading representation,” said Stephen Innes, managing partner at SPI Asset Management.
“It’s worth recalling that technical problems related to the ICBC hack were widely perceived as contributing to the seemingly poor outcome of the long bond sale,” Innes said.
In U.S. economic data, existing-home sales fell 4.1% in October to a seasonally adjusted annual rate of 3.79 million, the National Association of Realtors said Tuesday. Sales are down 14.6% from a year ago.
U.S. bond markets will be closed Thursday for the Thanksgiving Day holiday, and will close early on Friday.
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