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U.S. bond yields jumped on Tuesday, led by 1- through 3-year rates, as traders bet that easing banking-sector angst will allow the Federal Reserve to raise interest rates by a quarter-of-a-percentage-point this week and in May.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.103%
soared to 4.175% to 3.922% as of Monday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.548%
jumped to 3.5285% from 3.477% Monday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.709%
rose to 3.730% from 3.66% late Monday.
What’s driving markets
Traders focused on waning bank stress, which reduced demand for perceived haven assets and pushed up Treasury yields on Tuesday, adding to the view that the Federal Reserve can continue to raise interest rates this week as it maintains its battle against inflation.
The trend is broad, with 10-year German bund yields
TMBMKDE-10Y,
adding 15.8 basis points to 2.278% and equivalent-maturity U.K. gilts
TMBMKGB-10Y,
up 8.9 basis points to 3.401%.
Traders are pricing in a 81.9% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on Wednesday, according to the CME FedWatch tool. The central bank is mostly expected to take its fed funds rate target to between 5% and 5.25% by May, and traders have pulled back on the number of rate cuts they expect for this year, according to 30-day Fed Funds futures.
Tensions in government bonds remain. As of Tuesday, the ICE BoAML MOVE index, a gauge of expected Treasury market volatility, was at its highest level since late 2008 and up more than 80% since the start of February.
What analysts are saying
“The Federal Reserve begins its two-day policy meeting today in the middle of a storm. If the European Central Bank decision [a 50 basis point hike last Thursday] serves as a cheat sheet, the Fed could hike by 25bp and say that it has tools to inject liquidity in the system to contain crisis,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Investors are also focused on what the Fed will do with the Quantitative Tightening (QT). I don’t think that the Fed will reverse its balance sheet unwinding strategy, [or pause it] – because the crisis intervention is a tactical and a short-term move, while the Fed’s huge $8.6 trillion balance sheet must be unwound sooner rather than later.”
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