Bond Report: Treasury yields extend climb ahead of final Fed decision of 2017

December 13
19:04 2017

Treasury yields rose on Wednesday ahead of a key decision of the Federal Reserve that is anticipated to result in the third interest-rate increase of 2017. Investors in government paper are expected to focus on the central bank’s inflation outlook and its assessment of the health of the U.S. economy, both of which will factor in the pace of policy normalization in 2018.

What are Treasury yields doing?

The yield on the 10-year Treasury note TMUBMUSD10Y, +0.52%  was at 2.420%, compared with 2.403% late Tuesday in New York. The 2-year note yield TMUBMUSD02Y, -1.33% the most sensitive to interest-rate policy, was at 1.848%, versus 1.829% in the previous session, while the yield of the 30-year bond TMUBMUSD30Y, +0.46%  was at 2.791%, compared with 2.782% on Tuesday.

Bond prices and yields move inversely.

What’s driving the bond market?

Wall Street is anticipating that the Fed’s policy-setting Federal Open Market Committee will raise short-term interest rates by a quarter percentage point to a range of 1.25% and 1.5% , the fifth such increase since the Janet Yellen’s central bank began raising rates from near zero at the end of 2015. An updated policy statement, and Fed members’ projections for future interest rates, known as the dot plot, will be released at 2 p.m. Eastern Time. Yellen is scheduled to field questions from reporters a half-hour later in her final news conference before she retires and is replaced by Fed. Gov. Jerome Powell.

Investors will be eager to hear the Fed’s expectations for economic growth, especially in light of House and Senate lawmakers’s efforts to pass a potentially business-boosting tax policy. Stubbornly low inflation, running below the Fed’s annual 2% target, has been a focus for bond investors because rising inflation can diminish the future value of fixed-income assets.

Muted inflation levels have held long-dated bond yields, the most attuned to shifts in the inflation outlook, in check throughout the year.

Subdued levels of rising prices, wages and inflation have encouraged the central bank to move cautiously in lifting short-term rates for fear of upending economic recovery.

However, there are signs that inflation may be perking up somewhat, with Yellen & Co. attempting to balance increasing interest rates from crisis-era levels against the backdrop of sluggish moves in prices. Annual inflation was above the Fed’s target in February but was just 1.6% in October by the Fed’s preferred measure of inflation, personal-consumption expenditures.

The market is pricing in about three rate increases in 2018, but more could be in the cards if the economy and inflation are viewed as likely in an uptrend.

What are market participants saying?

“As we highlighted recently, we expect the FOMC to be rather neutral for U.S. yields. A hike in December is a done deal and we do not expect changes in the ‘dots’,” wrote UniCredit in a Wednesday research note whose authors include strategist Kathrin Goretzki and economist Chiara Silvestre.

“We see higher rates in 2018. First, we think macro risks are more symmetric than priced. Second, we think the market is underestimating the cumulative effect of marginal changes by a growing number of central banks…” wrote rates strategist Ralf Preusser and Shyam Rajan at Bank of America Merrill Lynch in a Wednesday note. They said they expect the Fed, the European Central Bank, Bank of Japan, Bank of Canada, and authors to join in a policy-tightening trend.

What data are in focus?

Additional Inflation data for November are scheduled for release at 8:30 a.m. Eastern. Economists polled by MarketWatch expect a 0.4% rise for a consumer-price index.

What else is on investors’ radar?

Both the Bank of England and the European Central Bank meet on Thursday. U.K. inflation rose at an annual rate of 3.1% in November, providing some support to the notion that puzzling inflation may beginning to normalize.

Indeed, on Tuesday, a U.S. reading of wholesale prices rose 0.4% in November, pulling the inflation gauge up 3.1% over the past 12 months.

What are other assets doing?

The German 10-year government bond yield TMBMKDE-10Y, -0.10%  was at 0.324%, compared with 0.297% on Tuesday, while the U.K. 10-year bond yield TMBMKGB-10Y, -0.23%  was at 1.233%, versus 1.205% in the prior session.

Related Articles