U.S. bond yields initially rose early Wednesday as rising oil prices and recent signs the U.S. economy remains resilient increased concerns the Federal Reserve may have to keep interest rates higher for longer to quell inflation.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dipped by 2.1 basis points to 5.187%. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated less than 1 basis point to 4.826%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
rose 1.9 basis points to 4.950%.
What’s driving markets
Ten-year Treasury yields rose above 4.86% in early trading Wednesday, flirting with their highest levels since 2007, before pulling back to trade flat on the day around 4.83% as investors sought out perceived haven assets.
The initial move comes after a strong retail sales report released the previous day points to a U.S. economy remaining resilient which, along with recent data showing inflation is sticky, suggests the Federal Reserve may need to keep interest rates higher for longer.
Inflation concerns were reinforced by oil prices moving back towards recent highs amid increasing tensions in the Middle East.
Markets are pricing in a 90% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is priced at 38%, up from 26% a year ago. The central bank is not expected to take its Fed funds rate target back down to around 5% until October 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Wednesday include September housing starts and building permits at 8:30 a.m., and the Fed Beige Book at 2 p.m.. All times Eastern.
Fed officials due to make comments include Governor Chris Waller at noon; New York Fed President John Williams at 12:30 p.m.; Richmond Fed President Tom Barkin at 1 p.m.; and Philadelphia Fed President Patrick Harker at 3:15 p.m..
The U.S. Treasury will auction $13 billion of 20-year bonds at 1 p.m.
The Bank of Japan on Wednesday announced another round of unscheduled bond purchases after the country’s 10-year bond yield hit a fresh decade-high of 0.815%, according to Bloomberg.
What are analysts saying
“Consumers were in a spending mood last month. The stronger-than-forecast 0.7% month-over-month rise in retail sales in September and upward revisions to the prior two months indicate that consumers maintained a buoyant pace of spending as employment and income growth were sturdy,” said analysts at Nationwide Economics in a note.
“From the monetary policy perspective, strong consumer spending data alongside persistently elevated inflation underscore that the Fed will keep interest rates at restrictive levels for some time.,” they added.
