Treasury yields slip with Fed set to kick off 2-day policy meeting

Treasury yields slipped Tuesday as the Federal Reserve prepared to kick off a two-day policy meeting that’s expected to see another 75 basis point rise in the fed-funds rate.

What yields are doing
  • The yield on the 2-year Treasury note
    TMUBMUSD02Y,
    2.988%

    fell to 2.984%, down from 3.035% at 3 p.m. Eastern on Monday.

  • The 10-year Treasury note yield
    TMUBMUSD10Y,
    2.725%

    was at 2.754% versus 2.819% Monday afternoon.

  • The yield on the 30-year Treasury bond
    TMUBMUSD30Y,
    2.963%

    dropped to 2.996% from 3.035% late Monday.

What’s driving the market

Fed-funds futures traders have priced in a 77.5% probability the Fed will lift the fed-funds rate by 75 basis points, or three-quarters of a percentage point, when it completes its meeting on Wednesday afternoon. The Fed delivered a 75 basis point rise in June, its first such outsize increase since 2002, and has aggressively lifted interest rates this year as it attempts to curb inflation running at its hottest in nearly four decades.

Fears the Fed, in its effort to play catchup with inflation, could push the economy into a steep slowdown or outright recession have been on the rise. An inversion of the 10-year versus 2-year measure of the yield curve, seen as a reliable recession warning flag, have underscored those concerns.

Meanwhile, stock-index futures pointed to a weak start for Wall Street after disappointing earnings from retail giant Walmart Inc.
WMT,
-8.41%

late Monday showed consumers are feeling a pinch from inflation.

The Case-Shiller report on May house prices was due at 9 a.m., while a July consumer-confidence index from the Conference Board and data on June existing home sales were set for 10 a.m.

What analysts say

“Tomorrow’s [Fed] decision is almost certain to see a 75bp rate hike, accompanied by enough hawkishness to keep the debate about whether September will see another 75bp hike, or a marginal slowdown to 50bp, alive and well,” said Kit Juckes, global macro strategist at Societe Generale, in a note.

“I can’t see any scope for [Fed Chair] Jay Powell to back off a hawkish message, despite the market concerns about the economic outlook. And this, of course, is always the problem — higher rates affect the economy with a lag, and if they’ve done enough already, they’re doomed to do too much before that becomes clear,” he wrote. “Which will only increase the pleas from the economics community for fiscal policy to take up some of the inflation-fighting slack, despite being prone to even longer lags between policy announcement and impact on the economy.”

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