2-year Treasury yield extends advance as rate hike expectations grow by 75 basis points

The yield on the 2-year Treasury note extended its climb on Tuesday as expectations grew that the Federal Reserve will hike interest rates by 75 basis points, or three-quarters of a percentage point, when it concludes its monetary policy meeting this week.

What returns do
  • The yield of the 10-year Treasury note TMUBMUSD10Y,
    fell to 3.301%, down from 3.371% as of 3:00 p.m. ET on Monday.

  • The yield of the 2-year Treasury Note TMUBMUSD02Y,
    rose to 3.288% from 3.279% on Monday afternoon.

  • The yield of the 30-year government bond TMUBMUSD30Y,
    was 3.305% versus 3.368% late Monday.

  • The yield on the 2-year note late Monday was its highest 3 p.m. level since December 26, 2007, while the 10-year yield was the highest since April 21, 2011 and the 30-year the highest since December 9. November was , 2018.

What moves the market

Investors and economists have raised expectations that the Fed will raise its benchmark interest rate by three-quarters of a point when policymakers conclude Wednesday’s meeting. Fed Chair Jerome Powell had previously said steps of half a percentage point were on the table for June and July after the Fed delivered a half-point hike in May.

Expectations for a larger rise followed a surprise CPI reading on Friday that showed year-on-year inflation accelerating to a 40-year high of 8.6%.

The Wall Street Journal reported Monday that the latest inflation reports would likely prompt Federal Reserve officials to surprise markets with a 75 basis point move. Several economists had also hinted at the possibility of a 75 basis point hike following May’s CPI reading.

On Monday, JPMorgan Chase & Co. economist Michael Feroli pointed to the “startling rise in longer-term inflation expectations” in a Friday consumer sentiment report and an article in the Wall Street Journal as he revised his forecast for this week’s rise to 75 Base points raised hike. Goldman Sachs economists also called for a 75 basis point move.

Read: Economists at JP Morgan and Goldman now expect the Fed to hike rates by 75 basis points on Wednesday

The 2-year Treasury yield edged out the 10-year yield on Monday, threatening to reverse that level of the yield curve. The 2/10 year yield curve briefly inverted in late March and early April. A prolonged inversion of this measure of the curve is seen as a recession warning signal.

Meanwhile, the sharp rise in real, or inflation-adjusted, yields has been blamed for adding to the stock market carnage, with major indices falling on Monday and the S&P 500 SPX.
Confirmation of entry into a bear market.

The NFIB Small Business Optimism Index edged down to 93.1 in May from 93.2 in April, its lowest level since April 2020, according to data released Tuesday by the National Federation of Independent Business. The reading was broadly in line with economists’ expectations in a Wall Street Journal poll.

What Analysts Say

“Following the dynamic movements of the past two trading days, money markets now see a more than even likelihood that the Fed will announce a 75 basis point rate hike after the end of the two-day FOMC meeting that begins today,” economists at UniCredit Bank wrote , in a note.

“Going forward, money market futures are pointing to a peak in the fed funds’ target interest rate near 4%,” they wrote. “We maintain our view that the Fed will stick to its script of raising rates by 50 basis points at this week’s and the upcoming FOMC meeting in late July, as we believe such a trajectory is steep enough to tighten financial conditions. “ 2-year Treasury yield extends advance as rate hike expectations grow by 75 basis points

Brian Lowry

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