Yields on 2-, 10- and 30-year Treasurys fell from multiyear highs Wednesday morning, as investors positioned ahead of an expected 75 basis point interest rate hike by the Federal Reserve.
What are yields are doing
The 2-year Treasury note yield
TMUBMUSD02Y,
3.348%
fell to 3.323% from 3.435%, its highest level since Nov. 14, 2007, according to Dow Jones Market Data. Wednesday’s drop comes on the heels of the largest eight-day yield rise for the 2-year note since Aug. 14, 1989, as of Tuesday.The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.415%
dropped to 3.406% from 3.482% on Tuesday, which was the highest level since April 14, 2011. As of Tuesday, the yield had seen its biggest five-day rise since Oct. 14, 2008.The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.403%
slipped to 3.385% from 3.432% on Tuesday. Tuesday’s level was the highest since Nov. 2, 2018.
What’s driving the market?
Investors poured back into Treasurys on Wednesday, pushing yields lower across the curve in morning trading, with markets widely expecting a 75 basis point, or three quarters of a percentage point, interest rate hike from the Federal Reserve. The magnitude of such a hike would be the biggest in almost 28 years.
Read: JP Morgan, Goldman economists now expect Fed to raise rates by 75 basis points on Wednesday
While some fear more aggressive action could trigger a recession, the Fed may be backed into a corner by last Friday’s surprise May consumer-price index reading that showed the annual headline inflation rate surging to a 40-year high of 8.6%. And prices of wholesale goods and services jumped 0.8% in May, Tuesday’s data showed.
Read: Bill Ackman says Fed should hike rates by at least 75 basis points at next two meetings
And: In `fragile’ financial markets ahead of Fed’s decision, some traders and strategists see risk of instant recession
Data released on Wednesday showed that U.S. retail sales fell 0.3% in May, the first decline since the end of 2021, on fewer auto purchases; rising prices may have also discouraged shoppers. And the cost of imported goods rose 0.6% in May, feeding into the largest increase in U.S. inflation since the early 1980s.
In Europe, central bank policy makers surprised markets with a rare “ad hoc” meeting, which produced a commitment to fight widening bond spreads. Borrowing costs have soared in Europe, notably since the central bank announced at its recent June gathering that its key interest rate would rise 25 basis points in July, and possibly a larger increment in September.
What analysts are saying
“As a reminder of the cracks that can emerge in the present economic and monetary policy environment, overnight the ECB announced an emergency meeting to discuss addressing market fragmentation following this week’s surge in periphery rates. The European bond market is admittedly a far different landscape than Treasuries, but the response in Frankfurt so early in the normalization process nonetheless showcases the broader impact that the hawkish monetary policy on a global scale is having on financial markets,” BMO Capital Markets strategists Benjamin Jeffery and Ian Lyngen wrote in a note.
“While the FOMC will not respond directly to cross-European yield moves, the news from the ECB emphasizes an aspect of the Fed’s pursuits in addition to stable prices and maximum employment. Smooth market functioning has also historically been something of a shadow mandate,” they wrote.
