Treasury yields held mostly steady at higher levels on Wednesday after minutes of the Federal Reserve’s May 2-3 meeting said policy makers were uncertain about the extent to which further interest rate hikes would be needed.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.356%
was little changed at 4.336% from 4.333% on Tuesday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.720%
was 3.715%, up slightly from 3.696% on Tuesday. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.969%
was 3.958%, up slightly from 3.951% as of Tuesday.
What’s driving markets
Treasury yields held steady on Wednesday after the release of minutes from the Federal Reserve’s May meeting. Participants on the rate-setting Federal Open Market Committee generally agreed that the extent to which additional rate hikes may be appropriate after this month had become less certain.
Many participants “focused on the need to retain optionality after this meeting,” the minutes said. In addition, some of them had concerns that the U.S. debt ceiling might not be raised in a timely manner, “threatening significant disruptions to the financial system and tighter financial conditions that weaken the economy.”
Read: ‘Several’ Fed officials said more rate hikes may not be needed, and other key takeaways from May minutes
Yields had started moving higher earlier in the session, when Fed Gov. Christopher Waller said he would back more rate hikes unless there’s more progress on inflation. Fed funds futures traders boosted the chance of another quarter-of-a-percentage-point rate hike on June 14, to 30.6% which would take the Fed’s main interest-rate target to between 5.25%-5.5%, according to the CME FedWatch tool. Traders also see a 10.6% chance of another quarter-point hike in July.
Meanwhile, yields on 1-month through 1-year Treasury bills were all above 5% and either at or near multiyear highs on Wednesday as concerns about the debt-ceiling deadline next week continued to pressure the market for government debt. The rate on the 1-month Treasury bill, which has been one of the maturities trading as a proxy for debt-ceiling angst, was not far from its May 12 closing level of 5.68%, the highest level since at least June 2010, according to Tradeweb.
Read: Debt-ceiling angst drives more Treasury bill yields above 6%
On Wednesday, U.S. Treasury Secretary Janet Yellen expressed concern about “substantial financial-market distress,” even if there is a debt-ceiling deal. Meanwhile, House Speaker Kevin McCarthy told reporters that he was hopeful for progress in negotiations, and “firmly” believes an agreement will be reached.
U.K. government bonds were the notable underperformers on Wednesday, with 2-year yields
TMBMKGB-02Y,
spiking 23 basis points to almost 4.36% after inflation for April came in higher than expected, at 8.7% on a year-over-year basis. Traders are now pricing in a peak Bank of England interest rate of 5.5%, compared with 4.5% currently.
What analysts are saying
“As for what it all means for the path of policy from here, any further tightening will need to be predicated on the data, and the Committee is pursuing optionality both as it pertains to June’s hike or pause, but also beyond. This puts the onus on next week’s employment report, along with the June 13 release of CPI to determine whether or not the FOMC will opt to deliver another 25 bp hike this cycle,” said BMO Capital Markets strategist Ben Jeffery.
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