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Bond Report: Treasury yields tick higher as Fed decision looms


Treasury yields rose on Monday as traders prepared for the Federal Reserve’s rate-setting decision in two days.

What’s happening

The yield on the 2-year Treasury note

rose 7.7 basis points to 4.499% at 3 p.m. Eastern. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury note

advanced 6.5 basis points to 4.074%.

The yield on the 30-year Treasury bond

rose 7.5 basis points to 4.203%.

What’s driving markets

Benchmark bond yields were bouncing on Monday from their biggest weekly declines in months as the Federal Reserve’s next interest-rate decision looms. Economists widely expect policy makers to approve a fourth straight jumbo interest-rate increase on Wednesday — a hike of three-quarters of a percentage point that would bring the central bank’s benchmark rate to a level of 3.75%- 4%.

Read: What Fed Chair Powell can say to keep the stock-market rally going — or kill it

On Friday, 2-, 10- and 30-year Treasury yields finished the New York session with their biggest weekly declines in at least three months as traders considered the possibility that Fed officials might back off aggressive rate hikes by year-end, given recent data.

Markets are pricing in an 86% probability that the Fed will raise interest rates by another 75 basis points, as well as a 14% chance of a smaller-than-expected 50-basis-point hike, on Wednesday. The central bank is also mostly expected to take its fed-funds rate target to at least between 4.75% and 5% by March, according to the CME FedWatch tool.

The Treasury Department said Monday it expects to borrow $550 billion in the fourth quarter, which is $150 billion higher than previously estimated. The increase was driven, in part, by projections of fiscal activity, greater than projected discount on marketable securities, and lower nonmarketable financing, the department said. The updated forecast includes an end-of-quarter cash balance of $700 billion. 

In the only major U.S. economic release on Monday, the Chicago purchasing managers index fell to 45.2 October from 45.7 in the prior month.

Later this week, traders must contend with a Bank of England rate decision on Thursday, which “although less pivotal than it could have been a few weeks back is still something that can influence global markets,” said Deutsche Bank’s Jim Reid, Henry Allen and Tim Wessel.

What analysts are saying

“After another ghastly 75 bp rate hike on Nov. 2 to subdue scary-high inflation, the Fed could treat markets to a smaller increase in December amid a downshifting economy,” said Michael Gregory and Sal Guatieri of BMO Capital Markets.

“While a spirited rebound in Q3 GDP has buried recession claims, the economy faces formidable headwinds, notably the most aggressive monetary tightening since the 1980,” they said in a note.

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