Bond Yields Rise as Market Volatility Declines

by Warren Seah

Bond yields experienced an increase on Wednesday, although market volatility showed signs of decline as investors focused on upcoming growth and inflation data. Here’s a closer look at what’s happening:

Yield Movement

  • The yield on the 2-year Treasury (BX:TMUBMUSD02Y) rose by 2.5 basis points to 5.091%. It is important to note that yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury (BX:TMUBMUSD10Y) increased by 4.4 basis points to 4.870%.
  • The yield on the 30-year Treasury (BX:TMUBMUSD30Y) dropped by 4.7 basis points to 4.986%.

Driving Factors

The current state of the Treasury market appears to be calmer compared to recent times. Traders are closely watching economic data that will be released in the coming sessions, as these figures could potentially impact the Federal Reserve’s medium-term thinking ahead of its monetary policy meeting next week.

After reaching a 16-year high above 5.02% on Monday, benchmark 10-year yields quickly declined to approximately 4.82%. This sharp drop was attributed to warnings from prominent investors Bill Gross and Bill Ackman regarding the condition of the U.S. economy. At present, these yields remain slightly above their lowest levels from the past week.

Looking ahead, there are several U.S. economic updates scheduled for release. On Wednesday, the market anticipates new home sales data for September, slated for 10 a.m. Eastern Time. However, it is the initial jobless claims data and third-quarter GDP reading on Thursday, followed by the Fed’s favored inflation report – the PCE index – on Friday that have garnered significant attention from traders.

Markets Anticipate No Change in Interest Rates

Ahead of the next Federal Reserve meeting on November 1, market indicators suggest a high probability of interest rates remaining unchanged. The CME FedWatch tool reveals that markets are currently pricing in a 97% likelihood of the Fed leaving interest rates within a range of 5.25% to 5.50%.

Decreased Expectations for Rate Hike in December

Contrary to last year’s projections, the chances of a 25 basis point rate hike in December–bringing the range to 5.50% to 5.75%–have dwindled. Current estimations place the probability at 29%, down from the previous figure of 37%.

Long-term Forecasts for Interest Rates

According to 30-day Fed Funds futures, it is not anticipated that the central bank will lower its target for the Fed funds rate to around 5% until September of 2024, indicating a sustained period of stability.

Upcoming Treasury Bond Auction

On November 1 at 1 p.m., the Treasury will hold an auction for $52 billion worth of 5-year bonds, providing an opportunity for investors.

Insights from Analysts

While longer-term yields experience a temporary pause in their upward trajectory, Lindsey M. Piegza, the chief economist at Stifel, believes this shift is not indicative of a fundamental change in investor sentiment or economic conditions. Instead, it is thought to be a result of larger market players adjusting their positions.

Despite this, there remains uncertainty surrounding monetary policy as the Federal Reserve nears its upcoming decision on November 1. Market participants currently expect the Fed to maintain its position, but Chair Powell has made it clear that potential rate hikes are still on the table should inflation concerns persist. Thus, all eyes are on the release of this week’s PCE report, further increasing the focus on economic indicators.

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