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Bond yields continued to rise, reaching a fresh 15-year high on Thursday, as traders bet a resilient U.S. economy will encourage the Federal Reserve to raise interest rates further.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
was barely changed at 4.965%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
added 3.1 basis points to 4.287%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
gained 5 basis points to 4.406%.
What’s driving markets
U.S. economic updates set for release on Thursday include the weekly initial jobless claims and the August Philadelphia Fed manufacturing survey, both due at 8:30 a.m. Eastern. The leading economic indicators report will be released at 10 a.m..
The reports provide yet more data for the Federal Reserve to chew on as officials consider whether to continue raising interest rates in order to suppress inflation that has come down markedly in recent months but remains above the central bank’s 2% target.
Minutes of the Fed’s July monetary policy meeting, released Wednesday, suggest it remains wary of stopping tightening lest inflation prove stubbornly high. Indeed, more recent snapshots, such as stronger than expected July retail sales published this week, point to an economy that seems to have easily absorbed the Fed’s monetary tightening campaign.
The yield on 10-year Treasuries on Thursday at one pint rose above 4.31%, the most since the 2008 global financial crisis.
Markets are pricing in an 87% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on Sept. 20, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 35%. The central bank is not expected to take its Fed funds rate target back down to around 5% until June 2024, according to 30-day Fed Funds futures.
What are analysts saying
“The Fed continues to see below trend growth and a softening labor market as the path back to 2% inflation, with policy focused on ‘balancing the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening’. Apologies, but the economy cannot be managed, let alone by monetary policy, with such precision,” said Steven Blitz, chief U.S. economist at research firm GlobalData. TS Lombard, in a note published late Wednesday.
Blitz concluded his note: “[T]he Fed will ease when the unemployment rate broaches 4% and not before. Recessionary dynamics are in place, now aided by capital market price shifts, and this keeps my recession call in place. The risk of reacceleration as the slowdown from 2021 bottoms, that, in time, delivers an upward bias to inflation, is not a probability to be ignored. If there is no recession by autumn, a 6.5% funds and 6% 10Y UST sometime next year would not be a surprise. Everything working out as the Fed lays out, would be.”
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