Bond yields rose on Tuesday as traders bet that easing banking sector angst would allow the Federal Reserve to raise interest rates this week.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.116%
rose by 6.2 basis points to 4.053%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.546%
added 4.3 basis points to 3.529%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.704%
climbed 1.9 basis points to 3.691%.
What’s driving markets
A less febrile banking sector is reducing demand for perceived haven assets, pushing up Treasury yields, and adding to the belief that the Federal Reserve can continue to raise interest rates this week as it maintains its battle against inflation.
The trend is broad, with 10-year German bund yields
TMBMKDE-10Y,
adding 8.4 basis points to 2.203% and equivalent maturity U.K. gilts
TMBMKGB-10Y,
up 5.2 basis points to 3.363%.
Markets are pricing in a 83.4% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5.0% after its meeting on March 22nd, according to the CME FedWatch tool.
Early on Monday the chances of such a hike or no hike at all were roughly 50/50, as worries about the health of the banking sector was seen compromising the Fed’s ability to tighten policy further.
The central bank is expected to take its Fed funds rate target to 4.9% by May, and to about 4.5% by August, according to 30-day Fed Funds futures.
Tensions in government bonds remain. The ICE BoAML MOVE index, a gauge of expected Treasury market volatility, is just shy of 15-year highs and is up more than 80% since the start of February.
U.S. economic data due for release on Tuesday include the February existing home sales report, published at 10 a.m..
What are analysts saying
“The Federal Reserve begins its two-day policy meeting today in the middle of a storm. If the European Central Bank decision [a 50 basis point hike last Thursday] serves as a cheat sheet, the Fed could hike by 25bp and say that it has tools to inject liquidity in the system to contain crisis,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Investors are also focused on what the Fed will do with the Quantitative Tightening (QT). I don’t think that the Fed will reverse its balance sheet unwinding strategy, or to pause it – because the crisis intervention is a tactical and a short-term move, while the Fed’s huge $8.6 trillion balance sheet must be unwound sooner rather than later.”
“All the comments that have not been made since the SVB collapse will come out from Fed Chair Jerome Powell’s mouth, and the March dot plot tomorrow after the decision,” she added.
