Treasury yields dived on Wednesday after Federal Reserve policy makers signaled just one additional interest rate hike will be appropriate this year and as Chairman Jerome Powell addressed banking-system concerns in his press conference.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.010% dropped to 3.943% from 4.175% on Tuesday. It had jumped by the most in one day since June 5, 2009, during the prior session.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.508% fell to 3.471% versus 3.603% as of late Tuesday.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.705% was 3.667%, down from 3.734% Tuesday afternoon.
What’s driving markets
On Wednesday, Fed policy makers voted to deliver their second quarter percentage point rate hike in a row, bringing the fed funds rate target to between 4.75% to 5%. Their median 2023 projection for the appropriate level of the target remained at 5.1%, giving markets reason to believe that no more than one more rate hike is in store.
See: Fed hikes interest rates again, pencils in just one more rate rise in 2023
During his press conference, Powell said the central bank will use all its tools to keep the banking sector safe and sound, and that it’s too soon to say how central bank policy should respond to the recent stress in the banking system. Meanwhile, policy makers are committed to bring inflation back to the Fed’s 2% target, he said.
As he spoke, traders priced in a 45.2% chance of a pause in rate rises in May and a 54.2% likelihood of another quarter-point hike in May that would take the fed funds rate to between 5% and 5.25%, according to the CME FedWatch tool.
The Fed’s decision follows a period of extreme volatility in bond markets as investors have tried to work out how much the central bank’s determination to curb inflation will be compromised by a desire not to exacerbate fractures in the banking system.
The ICE BoAML MOVE index, a gauge of expected Treasury volatility, slipped to 162.31 as of Tuesday but was still near one of its highest levels since the 2007-2009 financial crisis and recession.
The difficulties central banks are facing were illustrated by new inflation data from the U.K. on Wednesday. Ten-year gilt TMBMKGB-10Y, 3.451% yields rose 8.2 basis points to 3.451% after a report showed consumer-price rises accelerated to 10.4% year over year in February, a move seen cementing another 25-basis-point rate hike by the Bank of England on Thursday.
What analysts are saying
“There was some expectation that the median 2023 dot would move up and the fact that it didn’t came off as a bit dovish,” Blake Gwinn, head of U.S. rates strategy for RBC Capital Markets, said via phone. As for the reference in the Fed’s statement to the U.S. banking system as being “sound and resilient,” policy makers’ instinct is “to sound fairly confident on these things and that’s what they did.” Still, “they rightfully acknowledged” that recent developments are likely to produce tighter conditions for households and businesses and to weigh on economic activity.