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Bond Report: U.S. bond yields stabilize ahead of Fed’s widely expected rate hike


Bond yields fell on Wednesday ahead of an expected rate hike by the Federal Reserve and as investors sought havens amid heightened geopolitical tensions.

What’s happening

The yield on the 2-year Treasury

slipped by 1 basis point to 3.954%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

retreated 3 basis points to 3.540%.

The yield on the 30-year Treasury

fell 3 basis points to 3.543%.

What’s driving markets

Benchmark bond yields were pulling back from multi-year highs as traders waited to see by how much Jay Powell and his colleagues at the Federal Reserve would raise interest rates on Wednesday.

The 10-year Treasury yield

hit 3.6% in the previous session, its highest since 2011, after a bigger-than-expected 100 basis point rate hike by Sweden’s central bank reinforced fears that global monetary authorities remain determined to sharply raise borrowing costs to damp inflation running in some places at 40-year peaks.

But yields nudged lower on Wednesday as buyers returned and investors also sought the perceived safety of U.S. government bonds after Russian President Vladimir Putin escalated his war against Ukraine.

“The Powell Fed has kept a hawkish tone in recent communications, clearly indicating a desire to forge ahead with rate hikes. After the strong August U.S. CPI print, a minority of observers are even looking for a 100-basis point move from the Fed today, though we are more likely to get 75 basis points,” said strategist at Saxo Bank in a morning note.

“This is a quarterly meeting that will bring the latest Fed forecasts for the economy and for the policy rate, a chance for the Fed to send a further message on where it sees its policy evolving for the remainder of this year and next,” the Saxo team added.

Markets are pricing in a 84% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.00% to 3.25% after its meeting. The central bank is expected to take its Fed funds rate target to 4.48% by April 2023, according to the CME FedWatch tool.

The Fed announcement is due at 2 pm and a press conference held by Powell is slated to begin at 2:30 pm, both Eastern.

“At the end of this FOMC meeting we would be surprised if the key takeaway was anything other than Powell and Co (at a minimum) maintaining the current hawkish narrative they have in place,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets.

“It seems he’s [Powell] learned his lesson. The only thing he is incentivized to say at this point is that they are going to keep going until inflation is in a better place even if that means risking recession. He will continue to push that idea during the presser,” Porcelli added.

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