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Bond Report: Most Treasury yields drift lower as Fed decision looms

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Most Treasury yields, except rates on monthly T-bills and the 2-year note, 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
TMUBMUSD02Y,
4.523%

was little changed at 4.490% from 4.499% on Monday. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
4.061%

retreated to 4.048% from 4.074% as of late Monday.

The yield on the 30-year Treasury
TMUBMUSD30Y,
4.130%

was 4.141%, down from 4.203% on Monday afternoon.

What’s driving markets

Buyers returned to Treasurys on Tuesday, with government bonds putting in what BMO Capital Markets strategists called a “solid overnight performance.”

Government bonds were possibly getting a boost from hopes that 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.

Meanwhile, the widely followed spread between the 2- and 10-year yields, which is often considered to be a harbinger of approaching U.S. recessions, shrank to as little as minus 49 basis points, and “there is little of technical relevance once -50 bp is breached to slow progress toward this cycle’s extreme of -58 bp,” BMO strategists Ian Lyngen and Ben Jeffery wrote in a note.

Markets have been pricing in a roughly 88% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4% on Wednesday.

In data released on Tuesday, U.S. job openings climbed to 10.72 million in September from 10.28 million previously, while the ISM manufacturing index for October barely expanded.

What analysts are saying

“We look for the FOMC to deliver another 75 (basis point) rate hike this week,” said a team of strategists at TD Securities. “The decision will bring policy to a level at which the Committee might feel more comfortable in shifting to a steadier hiking pace. The exact timing, however, will highly depend on the CPI data before the Dec meeting. Powell might offer some hints in the post-meeting presser.”

“Markets will look to any hints that the Fed is moderating in the response to inflation,” the team wrote in a note.

Economic Report: U.S. job openings jump to 10.7 million — labor market still too hot for the Fed

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