Bond Report: Most Treasury yields rise as Fed officials say they expect rate hike to ‘soon be appropriate’

United States

Most yields on U.S. government debt advanced, with the 10-year briefly trading above 1.8%, after Federal Reserve officials said a rate hike is expected to “soon be appropriate.”

What are yields doing?
  • The 10-year Treasury note TMUBMUSD10Y, 1.801% yields 1.795%, compared with 1.784% on Tuesday at 3 p.m. Eastern Time.
  • The 2-year Treasury note TMUBMUSD02Y, 1.028% rate sits at 1.021%, versus 1.025% on Tuesday, based on new issuance levels.
  • The 30-year Treasury bond TMUBMUSD30Y, 2.140% yields 2.137%, up from 2.129% on Tuesday afternoon.
What’s driving the market?

Federal Reserve officials held the fed funds rate target between zero and 0.25%, but said they expect “it will soon be appropriate to raise the target range for the federal funds rate,”  without commiting to a move in mid-March.

Attention now turns to Fed Chairman Jerome Powell’s news conference at 2:30 p.m. Eastern Time.

Read: Stock-market investors can’t count on the ‘Fed put’—why policy makers aren’t seen rushing to rescue

Minutes from the central bank’s December meeting, released early this month, surprised the market with how detailed the discussion was about shrinking the central bank’s almost $ 9 trillion balance sheet. Powell could provide an update on officials’ plans for the portfolio, though economists don’t expect specifics just yet. 

In U.S. economic reports, the U.S. trade deficit in goods topped $ 1 trillion in 2021 for the first time ever, as Americans snapped up a record amount of imports such as toys, cellphones and appliances. Meanwhile, new-home sales jumped nearly 12% in December to an 811,000 annual rate as supply shrunk, with buyers snatching up whatever inventory they could find.

Wednesday’s $ 26 billion auction of two-year floating-rate notes produced a strong indirect bid, according to Jefferies economists Thomas Simons and Aneta Markowska.

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What strategists are saying

“Rate hikes in March are all but certain,” Eve Lando, a muni bond portfolio manager at Thornburg Investment Management, said before the Fed’s statement was released. “I predict a measured, 25bps rate increase at each of the next four meetings and then we should reassess where we go from there.”

“The market likes predictability, so I want to hear Chair Powell acknowledge that despite risks out of our control such as geopolitical pressures and/or data about spikes in cases, the Fed will not change direction: taper and first half 2022 rate hikes,” Lando wrote in an email.