Fed rate decision sends US Treasuries in different directions

Shorter Treasury yields ticked higher, while longer-term yields fell on Wednesday after the Federal Reserve signaled that interest rates are likely to rise more this year than many investors had expected.

Treasuries rose initially, then fell broadly as Fed Chairman Jerome Powell held a post-meeting news conference in which he emphasized the central bank’s commitment to bringing down inflation while acknowledging the uncertain economic outlook.

The overall message from the Fed prompted investors to raise their forecasts for interest rates in the short term, but lower them in the longer term, as higher interest rates could lead to a stronger economic slowdown.

Investors and economists pay close attention to Treasury yields because they set a floor for borrowing costs across the economy and set a benchmark of future returns against which other assets are measured. This year’s rise has helped lift 30-year fixed mortgage rates above 6% for the first time since 2008 and has punished stocks by reducing the value of companies’ expected earnings.

Investors had widely expected the Fed to decide on Wednesday to raise its benchmark interest rate by 0.75 percentage points for the third meeting in a row. Investors were more surprised by the central bank’s interest rate projections, which showed the official median expected rates to rise to around 4.4% by the end of the year. That was a big jump from the 3.4% forecast in June and about 0.25 percentage point higher than many investors had anticipated – prompting an immediate jump in short-term interest rates.

In recent trade, the yield on the benchmark 10-year US Treasury bond was 3.528%, according to Tradeweb. That was down from 3.577% just before the rate decision and 3.571% on Tuesday, the highest close since March 2011.

The yield on the two-year note, which is more sensitive to the outlook for short-term interest rates, briefly rose above 4.1% but fell back to 4.024% in recent trade, up from 3.962% on Tuesday, its highest settlement since 2007 .

“There was a whole bunch of hawkish news going into this, and the Fed came out even more hawkish than the market,” said Zach Griffiths, a senior strategist who covers government bonds and investment-grade corporate bonds at research firm CreditSights.

Earlier in the trading session, yields – which fall when bond prices rise – fell after Russian President Vladimir Putin escalated the war in Ukraine by ordering the mobilization of reserve forces and hinting at Russia’s nuclear weapons capability. However, the decline was modest, and the Fed’s looming interest rate decision quickly took over investors’ attention.

The Federal Reserve approved its third consecutive rate hike of 0.75 percentage points as the central bank continues to fight high inflation. Photo: Sarah Silbiger/Bloomberg

Persistently high inflation and expectations of higher interest rates have been a driving force that has pushed up bond yields throughout the year. The 10-year interest rate has risen from just under 1.5% at the end of 2021 and around 2.6% at the start of August.

Interest rates fell in the early summer as investors became increasingly concerned that the United States was already in, or heading into, a recession. They have returned since those concerns subsided, and Fed officials emphasized that their overriding priority was to fight inflation, even if that meant some pain for the economy.


What is your current approach to bonds? Join the conversation below.

Two types of economic data scare investors the most. One is a series of measures showing rapidly rising wages, which many believe is the main contributor to inflation over the longer term. The second is the inflation data itself, with last week’s Consumer Price Index report showing another big jump in so-called core prices, which exclude volatile food and energy categories.

The result has been a high degree of uncertainty.

“It’s a foregone conclusion that the Fed will continue to hike,” said Jim Vogel, interest rate strategist at FHN Financial. “There is no telling when the Fed may slow rate hikes or the economy will show any impact from tighter monetary policy.”

Write to Sam Goldfarb at sam.goldfarb@wsj.com

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