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Bond Report: Treasury yields climb, pushing 2-year further above 4%, after Fed talks tough


The policy-sensitive 2-year U.S. bond yield moved further above its highest level in almost 15 years on Thursday, keeping the Treasury curve deeply inverted, as traders priced in the prospect of a resolutely hawkish Federal Reserve.

What’s happening

The yield on the 2-year Treasury

rose to 4.109% from 3.993% on Wednesday. Wednesday’s level was the highest since Oct. 16, 2007, based on 3 p.m. ET levels, according to Dow Jones Market Data.

The yield on the 10-year Treasury

advanced to 3.658% from 3.511% Wednesday afternoon.

The yield on the 30-year Treasury

climbed to 3.614% versus 3.581% late Wednesday.

What’s driving markets

Investors aggressively sold off government debt after Wednesday’s interest rate hike by the Federal Reserve was accompanied by hawkish comments from Fed Chair Jerome Powell.

The 2-year Treasury yield climbed above 4.1%, surpassing Wednesday’s level which marked the highest in more than a decade.

Markets are pricing in a 66% probability that the Fed will raise its policy interest rate by yet another 75 basis points to a range of 3.75% to 4.00% in November. Traders also see a better-than-not chance that the central bank takes its fed-funds rate target to between 4.5% and 4.75% by March, according to the CME FedWatch tool.

Some observers are slightly more hawkish. BofA Securities revised its outlook for the fed-funds rate target and now sees it reaching 4.75% to 5% by March, economist Michael Gapen wrote in a note Wednesday. That’s up from a previous forecast of 4% to 4.25%. 

The surge in the policy-sensitive 2-year U.S. government bond yield kept the rate’s spread to the 10-year Treasury yield inverted by as much as minus 59 basis points at one point on Thursday, which is further below the deepest level since 2000.

See: Fed will tolerate a recession, and 5 other things we learned from Powell’s press conference

In U.S. economic releases Thursday, the number of people who applied for unemployment benefits last week rose by 5,000 to 213,000.

Elsewhere, the yield on Japan’s 10-year note

was down 1.6 basis points at 0.245% after the Bank of Japan left overnight rates unchanged at minus 0.1%, eschewing the tighter policy of its peers.

But other central banks continued to raise borrowing costs to combat rapid price pressures. Norway hiked by 50 basis points to 2.25% and Switzerland pushed rates up by 75 basis points to 0.5%, bringing them out of negative territory. The Bank of England also lifted rates by 50 basis points to 2.25%, in a 5-4 vote.

What analysts are saying

“While the 75-basis point rise in U.S. rates was largely expected, particularly after U.S. inflation proved stickier than hoped in August, the messaging around the decision helped put markets in a tizz,” said Russ Mould, AJ Bell investment director.

“Powell, like a sawbones of yesteryear warning a patient the leg will have to come off to prevent the spread of gangrene, noted there was no painless way to bring inflation under control,” Mould said.

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