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Treasury yields held relatively steady on Wednesday after the release of the Federal Reserve’s policy decision, with 2- and 10-year rates not far from their highest levels since 2006-2007.
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
gained 1 basis points to 5.122% from 5.135% on Tuesday. Tuesday’s level was the highest since July 25, 2006, based on 3 p.m. Eastern time figures from Dow Jones Market Data. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated 1.1 basis points to 4.355% from 4.366% on Tuesday. Tuesday’s level was the highest for the 10-year rate since Oct. 31, 2007. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
fell 2.6 basis points to 4.402% from 4.428%. Tuesday’s level was the highest since Aug. 21.
What’s driving markets
As widely expected, policy makers took no action on Wednesday and kept their fed funds rate target at a 22-year high of between 5.25%-5.5%, while updating their economic projections and interest-rate forecasts. Fed officials said they are determining the extent of additional policy firming that might be needed, and pulled back on the amount of rate cuts they foresee for 2024.
Within minutes after the Fed’s statement was released, Treasury yields erased most of the declines seen earlier in the day, with 2- and 10-year yields back near their highest levels since 2006-2007. Attention now turns to Fed Chair Jerome Powell’s press conference, starting at 2:30 p.m. Eastern time.
According to Sam Stovall, chief investment strategist at CFRA Research, “the market is responding to what is essentially an unchanged situation: The Fed basically said, `we are not raising rates this time but may have one more hike this year’ and fewer rate cuts than the market was expecting in 2024.”
In the U.K. the 2-year government bond yield
BX:TMBMKGB-02Y
fell 14.3 basis points to 4.583% after data showed consumer prices surprisingly slipping to 6.7% year-over-year in August. That’s down from 6.8% in July and below economists expectations of 7%.
What analysts are saying
Strategists, traders and investors all agreed that rising oil prices likely aren’t being completely factored into Wednesday’s updated forecasts from the Fed.
“The Fed is not in the business of doing long-term predictions on oil. Policy makers have told us time and time again that they’re more concerned about core,” said Tim Magnusson, chief investment officer of the fixed income relative value strategy at Wayzata, Minn.-based hedge-fund firm Garda Capital Partners.
Still, “the more time that goes on in which energy stays elevated, the more likely that feeds into other categories of inflation,” he said via phone. “We certainly feel very strongly that getting inflation to come off from 9.1% down to around 3% was the easy part for the Fed. It’s going to be very, very difficult in my view to get to 2%.”
“I don’t see any way to get inflation back to 2% without a recession, it’s almost impossible,” Magnusson said. Policy makers “are going to want to run with a soft landing as long as they can.”
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