Bond Report: 2-year Treasury yield hits almost two-week high as Fed’s Powell dashes hopes for a pause in rate hikes

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.590%
rose 3 basis points to 4.568% from 4.538% on Tuesday. Wednesday’s level is the highest since Oct. 20, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 10-year Treasury
TMUBMUSD10Y,
4.088%
advanced less than 1 basis point to 4.059% from 4.052% as of Tuesday afternoon. The yield is up three of the past for trading sessions.

The yield on the 30-year Treasury
TMUBMUSD30Y,
4.122%
was marginally lower at 4.122% versus 4.124% late Tuesday.

What’s driving markets

As expected, Federal Reserve officials raised their benchmark interest rate target on Wednesday by another 75 basis points, to a range between 3.75% to 4%. Yet they added new language that said they would take into account “the cumulative tightening of monetary policy” and lagged impact of their actions, among other things, in considering the pace of future increases.

In a post-meeting press conference, Fed Chairman Jerome Powell reiterated that it will be appropriate “at some point” to slow the pace of rate increases, which might occur at policy makers’ December or January/February meeting. Still, officials have “some ways to go” and their decisions will be made on a meeting-by-meeting basis, he said.

“Our overarching focus is to bring inflation back” to the Fed’s 2% goal and to keep expectations “well-anchored,” Powell said. “We will stay the course until the job is done” and it is “very premature” to be thinking about a pause in rate hikes.

See: Fed approves another jumbo interest-rate hike, adds dovish language on way forward

Many investors had been hoping that the Fed would signal it is prepared to decelerate its pace of monetary tightening in coming months to allow its previous hikes to take effect. The central bank has swiftly driven its benchmark rate up from almost zero this year as it seeks to damp inflation running near 40-year highs.

Ahead of the Fed’s decision, data released on Wednesday showed that U.S. private payrolls rose by 239,000 in October, beating the 195,000 estimated gain seen by economists polled by The Wall Street Journal. The U.S. Labor Department’s nonfarm payrolls numbers for October on Friday.

In addition, the U.S. Treasury Department said on Wednesday that it has been talking to bond market participants about the potential uses for buybacks, but made no decision on whether to begin buying back some of its older debt.

Nervousness around potential sharp shifts in bond yields, along with concerns about meager market liquidity, left the ICE BofAML MOVE index, a gauge of expected Treasury volatility, hovering near 13-year highs earlier on Wednesday.Stock Market Today: Live coverage of Monday’s market action

What analysts are saying

 “The 75bp hike was as expected, but the change in the Fed’s statement in the third paragraph emphasizes two things we already knew: They will raise rates as high as it takes to fight inflation, and they’ll take into account the nature of monetary policy when they set rates accordingly,” FHN Financial Senior Economist Will Compernolle wrote in an email to MarketWatch.

“The addition is then somewhat of a mystery for now, though it could be communicating to markets that a slowdown in hikes does not necessarily mean a lower-than-expected terminal rate,” he said.