The 2-year Treasury yield reached its highest level since June on Wednesday after minutes of the Federal Reserve’s most recent meeting showed policy makers see a risk they might need to tighten “by more than necessary” to restore price stability.
- The yield on the 2-year Treasury TMUBMUSD02Y, 3.278% rose 4.4 basis points to 3.293% from 3.249% on Tuesday. That’s the highest level since June 14, based on 3 p.m. levels, according to Dow Jones Market Data.
- The yield on the 10-year Treasury TMUBMUSD10Y, 2.900% advanced 7.2 basis points to 2.894% from 2.822% as of late Tuesday. That’s the highest since July 21.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.154% rose 3.3 basis points to 3.146% versus 3.113% Tuesday afternoon.
What’s driving markets
Treasury yields remained higher after the minutes of the Fed’s July 26-27 meeting revealed that policy makers saw the need to raise its benchmark interest rate to a “restrictive” stance given the risk of the public questioning their resolve to bring down inflation.
The minutes from July’s meeting, at which the central bank hiked borrowing costs by 75 basis points, also revealed that many officials saw a risk that the Fed could tighten more than necessary, given the constantly changing nature of the economic environment and long, variable lags in monetary policy’s impact. Some officials also said the benchmark fed-funds rate target was still below neutral, or the level which neither stimulates nor restrains economic growth, even after July’s rate hike.
Investors remain unsure about the future pace of tightening by the Federal Open Market Committee. Fed futures traders flipped between expectations of a 75-basis-point and a 50-basis-point rate hike in September, according to the CME FedWatch Tool. The prospect of a larger rate hike has risen in recent sessions after this week’s earnings reports from Walmart WMT, +0.11% and Home Depot HD, -0.49% suggested consumers were in better condition than thought.
Wednesday’s data releases showed that U.S. retail sales fell flat in July, mostly because of declining gasoline prices and fewer new car and truck purchases. Economists polled by The Wall Street Journal had forecast a 0.1% increase in sales.
What analysts are saying
“While the FOMC minutes continue to emphasize the need to contain inflation, there is also an emerging concern the Fed could tighten more than necessary,” said FHN Financial Chief Economist Chris Low. “There is an inkling of improvement on the supply side of the economy, there is a bit of hope in some product prices moderating, but there is still a great deal of concern about inflation and inflation expectations.”
“All of this translated into a 75bp rate hike in July, a decision to keep tightening at future meetings, a decision to soon moderate the tightening pace and — from some participants — a reluctance to ease quickly once peak fed funds is reached,” Low wrote in a note.