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Bond Report: 2-year Treasury yield climbs to highest level in more than week as Fed decision looms

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Treasury yields were mixed on Tuesday, with the policy-sensitive 2-year rate climbing to a more than one-week high and longer-term rates falling, as traders prepared for Wednesday’s Federal Reserve policy announcement.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.557%

rose 3.9 basis points to 4.538% from 4.499% on Monday. That’s the highest level since Oct. 20, based on 3 p.m. figures from Dow Jones Market Data. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
4.048%

declined 2.2 basis points to 4.052% from 4.074% as of late Monday.

The yield on the 30-year Treasury
TMUBMUSD30Y,
4.098%

fell 7.9 basis points to 4.124% from 4.203% on Monday afternoon.

What’s driving markets

Three-month through 7-year Treasury yields all marched higher as markets prepared for a widely expected 75-basis-point rate hike by the Fed on Wednesday. Traders are pricing in an 87.5% chance that policy makers will lift interest rates on Wednesday to a range between 3.75% and 4%.

Meanwhile, longer-term government bonds rose after a news report indicated 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 increases triggered heightened volatility.

Read: Optimism seeps into Treasurys, fueled by hopes for intervention and ‘some positive news’ out of Powell

Data released on Tuesday showed that U.S. job openings climbed to 10.72 million in September, dimming hopes that the Fed might slow down the pace of hikes after Wednesday’s move.

The widely followed spread between the 2- and 10-year yields, 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.

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.

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