Treasury yields declined Tuesday as investors prepared for the start of a two-day Federal Reserve policy meeting that’s expected to deliver another interest rate increase and provide clues to the outlook for future policy moves.
The drop in yields was extended after a quarterly reading on U.S. labor costs rose less than expected.
What yields are doing
The yield on the 2-year Treasury note
fell 6.2 basis points to 4.199%. Yields and debt prices move opposite each other.
The 10-year Treasury note
yielded 3.507%, down 3.8 basis points.
The yield on the 30-year Treasury note
dropped 2.1 basis points to 3.634%.
The Federal Reserve on Wednesday is widely expected to deliver a 25 basis point increase in its policy interest rate, downshifting from the outsize 75- and 50-basis point increases delivered over the course of 2022. Fed-funds futures price in another quarter-point hike but see the central bank cutting rates by year-end, in contrast to the Fed’s forecasts which show policy makers expect no rate cuts by year-end. Moreover, Fed officials have insisted rates need to rise and remain there for some time to get inflation under control.
But doubters contend a slowing economy that could tip into recession and slowing inflation, albeit still well above the Fed’s 2% target, will lead the central bank to ease sooner than policy makers expect.
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How forcefully the Fed and Chair Jerome Powell pushes back against those expectations on Wednesday could set the tone for bonds and equities for the rest of the week, analysts said.
Also see: The Fed and the stock market are on a collision course this week
Meanwhile, the U.S. employment cost index showed a 1% rise, coming in below market expectations for a 1.1% increase.
What analysts say
“Powell is expected to strike a hawkish tone which is in contrast to market expectations over the Fed cutting rates near the end of 2023. This means the disconnect between the Fed and markets may add more spice to the pending meeting, as investors seek fresh clues on what to expect from the central bank this year,” said Lukman Otunuga, senior research analyst at FXTM, in a note.