Bond Report: Treasury yields move lower as Fed decision looms


Bond yields fell on Tuesday as traders increased fixed income exposure ahead of Wednesday’s Federal Reserve policy announcement.

What’s happening

The yield on the 2-year Treasury

slipped 6.6 basis points to 4.420%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

retreated 5.2 basis points to 3.966%.

The yield on the 30-year Treasury

fell 10.4 basis points to 4.097%.

What’s driving markets

Investors increased Treasury holdings ahead of the Federal Reserve’s monetary policy decision on Wednesday.

Markets are pricing in a 88% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4.00% after its meeting on November 2nd. The central bank is expected to take its Fed funds rate target to 4.94% by May 2023, according to the CME FedWatch tool.

Economic data for the central bank to consider before Wednesday’s announcement include on Tuesday the S&P U.S. manufacturing PMI for October, due at 9:45 a.m. and the ISM manufacturing index for October at 10 a.m. The jobs openings reports will also be published at 10 a.m. All times Eastern.

Indeed, it is a busy few days for jobs reports, noted Steven Ricchiuto, U.S. chief economist at Mizuho Securities, with the October ADP figures on Wednesday, the weekly initial unemployment claims on Thursday, and the nonfarm payrolls numbers on Friday.

“This collection of labor market data will be critical in assessing whether the recent speculation of the Fed stepping back from outsized rate hikes is justified, or just another in a long list of premature policy pivot scenarios initiated by the equity bulls,” said Ricchiuto .

“Each of these data releases should provide useful new information on the health of the labor market and, therefore, progress the Fed is having on slowing the economy and fundamentally turning the tide on inflation,” he added.

Mislav Matejka, strategist at JP Morgan said that although some inflation measures continued to surprise on the upside, this was mainly because of higher prices for services, “and with a narrowing range of elevated components”.

“We believe that the disinflation phase has already begun, and that inflation prints, both the headline and core, will be meaningfully lower in 3-6 months’ time. Our economists project US core CPI at 5.3% yoy rate in Q1, vs 6.6% currently, and headline at 5.7%, vs 8.2% at present,” Matejka wrote in a note to clients.

Government bonds were also possibly getting a boost from hopes the Treasury Department might intervene in the market to improve liquidity. The Financial Times reported that investors were urging the U.S. government to potentially buy back older Treasury bonds to improve market depth after the Fed’s campaign of sharp rate rises triggered heightened volatility.

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