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Bond Report: Treasury curve flattens after Fed lifts rates for first time since 2018, signals more hikes are on the way

Treasury yields advanced further on Wedneday from their highest levels in almost three years after the Federal Reserve delivered a quarter percentage point interest rate increase — its first hike since 2018 — and signaled more hikes are on the way.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.229%

was at 2.241% versus 2.16% at 3 p.m. Eastern on Wednesday.

The 2-year Treasury note yield
TMUBMUSD02Y,
1.999%

was around 2%, up from 1.855% Wednesday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.511%

stood at 2.528%, up from 2.503% late Wednesday.

On Tuesday, the yield on the 10-year note reached its highest since May 30, 2019, based on 3 p.m. levels, according to Dow Jones Market Data; 2- and 30-year yields hit their highest since July 31, 2019.

What’s driving the market?

As expected, Federal Reserve officials lifted their benchmark policy rate target by a quarter point to between 0.25% and 0.5% rate, the first rate hike since 2018. They also signaled the fed funds rate could hit roughly 2.8% by the end of 2023, and said they plan to begin the process of shrinking their almost $9 trillion balance sheet at a coming meeting. Fed Chairman Jerome Powell will hold a news conference at 2:30 p.m. Eastern time.

Yields rose across the board after the release of the Fed’s policy statement — led by the 2- and 3-year rates, which reflects the central bank’s near-term policy path.

Uncertainty resulting from Russia’s invasion of Ukraine and commodity price shocks were adding to some uncertainty about the outlook, the Fed said. 

Prior to the Fed’s decision , analysts had pointed to some optimism around talks on ending the war between Moscow and Kyiv after Ukraine President Volodymyr Zelensky was quoted as saying negotiations had become “more realistic” and Russian Foreign Minister Sergei Lavrov said there was “hope for reaching a compromise.” Meanwhile, U.S. President Joe Biden signed off on hundreds of millions of dollars in new security aid for Ukraine.

U.S. data released earlier on Wednesday showed retail sales slowed sharply in February, rising a scant 0.3%. Meanwhile, import prices climbed 1.4% last month and 10.9% over the past year. And the National Association of Home Builders’ monthly confidence index fell two points from the previous month’s downwardly-revised report to a reading of 79 in March, as expectations around future home sales worsened.

Overseas, Chinese stock-market indexes jumped Wednesday, when the state-run Xinhua News Agency reported that Beijing would keep its stock markets stable and take measures to boost economic growth in the first quarter.

What are analysts saying?

“Yields are rising because the Fed sees itself raising its policy rate seven times this year, which would be a much more aggressive policy cycle than what we saw from 2015-2018,” said Tom Garretson of RBC Wealth Management in Minneapolis.

With inflation so high, “there is not only a strong risk that the curve inverts relatively early, but that the Fed will need to continue hiking anyway,” Jim Reid, head of thematic research at Deutsche Bank, wrote in a note ahead of the FOMC’s decision. U.S. inflation, gauged by the  consumer-price index, has risen to the second highest level “at the start of any post-war hiking cycle.”

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