U.S. Treasury yields turned higher on Wednesday as investors digested a Federal Reserve statement that policy makers intend to begin winding down bond purchases and said the factors boosting inflation are expected to be transitory.
What are yields doing?
- The yield on the 10-year Treasury note TMUBMUSD10Y, 1.592% was 1.594%, compared with 1.546% at 3 p.m. Eastern on Tuesday.
- The 2-year Treasury yield TMUBMUSD02Y, 0.497% edged up to 0.478%, compared with 0.454% on Tuesday afternoon. The 2-year note saw its biggest one-day fall since March 23, 2020, on Tuesday, a day after ending at a 19-month high.
- The 30-year Treasury bond yield TMUBMUSD30Y, 1.987% was higher at 2% versus 1.958% on Tuesday afternoon.
What’s driving the market?
The Federal Reserve announced it will begin to wind down a bond-buying program which was designed to prop up the economy during the pandemic, by reducing the pace of purchases by $15 billion per month, as expected. Policy makers also said they would be prepared to adjust the pace of purchases if warranted by changes in the economic outlook.
Investors will closely watch Fed Chairman Jerome Powell’s press conference for any clues on the timing of future interest rate hikes, as well as any possibility that the tapering of bond purchases could proceed at a faster pace. Analysts at BMO Capital Markets and Standard Chartered Bank, along with a team at BofA, are among those who have flagged the possibility that Powell’s remarks will be interpreted in such a way that leads to a continued flattening of the yield curve.
The yield curve — a line plotting yields across maturities — has flattened significantly over recent weeks as investors began to price in a more aggressive policy response from the Fed than previously expected, as well as the risk of an economic slowdown.
Earlier on Wednesday, data showed that privately run U.S. businesses created a fairly strong 571,000 new jobs in October, based on an ADP survey, in a sign companies are still managing to find workers despite the biggest labor shortage in decades. The increase in hiring was larger than expected, with economists surveyed by The Wall Street Journal expecting a 395,000 gain.
The ADP report was being used by investors for clues to Friday’s October jobs report from the U.S. Labor Department, though the relationship between the ADP data and official numbers isn’t particularly strong.
Meanwhile, IHS Market’s final reading of the services-sector purchasing managers index for October came in at 58.7 versus an initial reading of 58.2. The Institute for Supply Management’s closely watched index of services sector activity surged to 66.7% in October from 61.9%, above forecasts. Separately, U.S. September factory orders climbed 0.2%.
What are analysts saying?
“We think Powell will go to great lengths to drive home (as he did at the last FOMC meeting) that while the conditions for taper have been met, the conditions for [rates] liftoff have not,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets, in a note. “Of course, as our `22 growth/inflation forecasts highlight, we certainly believe conditions will be met for a hike next year — the open question is how many hikes.”