Treasury yields held steady Wednesday morning as investors awaited an expected interest rate increase by the Federal Reserve, though the spread between the 2- and 10-year yields went more negative in a worrisome sign about the economic outlook.
What yields are doing
- The 2-year Treasury note yield
was at 3.053%, up from 3.041% at 3 p.m. Eastern on Tuesday.
- The yield on the 10-year Treasury note
slipped to 2.76%, up from 2.786% Tuesday afternoon.
- The spread between the 2- and 10-year yields fell to as low as minus 29.4 basis points.
- The 30-year Treasury bond yield
was at 2.989% versus 3.008% late Tuesday.
What’s driving the market
The Federal Reserve concludes a two-day policy meeting Wednesday afternoon, with policy makers expected to lift the fed-funds rate by 75 basis points, or three-quarters of a percentage point, as it continues to tighten monetary policy in an effort to rein in inflation that has been running near a four-decade high.
The Fed will issue a policy statement at 2 p.m., with Chair Jerome Powell scheduled to hold a news conference at 2:30 p.m.
The Fed’s efforts to curb inflation have sparked fears the economy could see a sharp slowdown or tip into recession, with investors pricing in the prospect of rate cuts in 2023. The 2-year yield remains well above the 10-year, an inversion of the yield curve that has proven to be a reliable recession warning flag.
Market watchers expect Powell to face questions over recession fears and expectations for interest rate cuts to follow in 2023. On Tuesday, billionaire hedge-fund manager Bill Ackman said he expected Powell to show “hawkish resolve” and push back against investor expectations that the fed-funds rate is likely to peak near 3.4%.
In data released on Wednesday, U.S. June durable goods orders jumped 1.9% in June, but there were hints of weakness. The U.S. trade deficit in goods narrowed for a third straight month in June and pending home sales fell by 8.6% last month.
What analysts say
“Money market forwards indicate the peak in the current cycle at between 3.25% and 3.5% in December (in line with our forecast) with two to three rate cuts in 2023, starting at the June meeting,” said economists at UniCredit, in a note. “Given the political and public pressure on central banks to fight inflation at any cost, it is hard to see Fed Chair Jerome Powell indicating an earlier dovish pivot during the press conference.”
“For the time being, the 2-10 yield curve, which just reached another cyclical low yesterday, is highly likely to remain inverted for some months to come, with a deeper inversion probable,” they wrote.