Monday, January 30, 2023
HomeMarketTreasury Yields Rise Following Latest Fed Rate Increase

Treasury Yields Rise Following Latest Fed Rate Increase

Federal Reserve Chairman Jerome Powell.

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Drew Angerer/Getty Images

The Federal Reserve said that it plans to raise short-term rates by another half percentage-point to a target level of 4.25% to 4.50%, just as expected. After falling initially following the announcement, Treasury prices were moving up.

Yields on 10-year Treasurys fell slightly. Yields on two-year Treasury debt were higher.

“I think there was too much enthusiasm from the CPI,” said Peter Baden, chief investment officer at Genoa Asset Management, referring to the latest consumer price index data. The November CPI, released on Tuesday, revealed that headline inflation had dropped to a lower than expected annual rate of 7.1% from 7.7% the previous month. It marked the second straight month of encouraging results for that data.

“I don’t think two prints of a good CPI number are going to make them change their mind any time soon,” said Baden, referring to the Federal Reserve and the rate-increasing path it has charted.

In a press conference following the announcement of the rate increase, Fed Chairman Jerome Powell said the inflation data so far from October and November “show a welcome reduction in the monthly pace of the price increases, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

The 10-Year Treasury bond, which has rallied recently partly on optimism that inflation was heading in the right direction, was yielding 3.49% following the Fed’s announcement, down slightly from its closing level Tuesday of 3.5%. Bond prices and yields move in opposite directions. It had been a little higher at around 3.55% on Wednesday afternoon.

The two-year Treasury’s yield was at 4.23% from around 4.2% prior to the announcement.

A key consideration for the bond market is where short-term rates will settle when the Fed ends its policy-tightening initiative. That level, known as the terminal rate, is critical for the two-year Treasury.

Baden said the futures market is anticipating another half percentage-point of rate hikes, which would boost the Fed funds rate to around 5%.

The median forecast of the 19 Federal Open Market Committee members is for the peak federal funds rate in 2023 to hit 5.1%. That’s up from 4.6% in September and 3.8% in June.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com

Credit: marketwatch.com

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