Amid ongoing speculation about the Federal Reserve’s stance on interest rates, bond yields experienced another drop on Wednesday, reaching their lowest point in September.
Key Points
- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) decreased by 1.7 basis points to 4.957%. It’s important to note that bond yields move in the opposite direction of prices.
- The yield on the 10-year Treasury (BX:TMUBMUSD10Y) retreated 9.5 basis points to 4.570%.
- The yield on the 30-year Treasury (BX:TMUBMUSD30Y) fell 10.2 basis points to 4.732%.
Market Factors
Early on Wednesday, there was a decline in ten-year Treasury yields, which have dropped by nearly 30 basis points since reaching a 16-year high around 4.85% last Friday.
Evidence suggesting that investors seeking safe havens played a role in the recent rise in Treasury prices emerged during European trading on Wednesday. The news of a rocket being fired at Israeli positions from Lebanon caused further reductions in yields.
Nonetheless, market analysts assert that the primary reason for the recent drop in benchmark yields is the perceived change in sentiment among Federal Reserve officials. It appears that officials now indicate that there may not be a need for further interest rate hikes in the current cycle.
This hypothesis will be tested soon as U.S. producer prices and U.S. consumer prices data are set to be released. Investment director Russ Mould of AJ Bell commented, “Producer prices often serve as leading indicators of consumer goods cost increases and consequently are an early warning for any re-emergence of inflationary pressures.”
Fed Speakers and Interest Rate Predictions
Traders anticipate a series of speeches by Federal Reserve officials on Wednesday. Fed Governor Christopher Waller will deliver comments in Park City, Utah at 10:15 a.m.; Atlanta Fed President Raphael Bostic is scheduled to discuss the economic outlook at 12:15 p.m.; and Boston Fed President Susan Collins will give the Goldman Lecture on Economics at Wellesley College at 4:30 p.m..
The market currently predicts an 86% chance that the Fed will maintain interest rates within a range of 5.25% to 5.50% after its upcoming meeting on November 1, according to the CME FedWatch tool.
The likelihood of a 25 basis point rate hike to a range of 5.50 to 5.75% at the following meeting in December is now priced at 25%, down from 40% a month ago.
Based on 30-day Fed Funds futures, it is not expected that the central bank will reduce its Fed funds rate target to around 5% until August 2024.
Additionally, the Treasury will hold an auction for $35 billion of 10-year notes at 1 p.m.
Analyst Views
According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, the release of the FOMC minutes will reinforce the notion that rates will remain elevated if inflation remains above target.
Ozkardeskaya also commented on the expectation of decreasing inflation for both producer and consumer prices. Despite higher crude oil prices, U.S. gasoline prices have been falling since mid-August due to a decline in refiner margins. This may impact September spending, but it remains uncertain how long gasoline prices will continue to decline.
Furthermore, Ozkardeskaya concluded that despite dovish Fed talk and safe haven inflows into U.S. treasuries due to tensions in the Middle East, there is still a risk for U.S. yields to increase. The U.S. 2-year yield currently sits 50 basis points above the upper range of the Fed funds policy target.
