Treasury yields rise as investors weigh Fed meeting, auction cuts

US Treasury yields edged higher on Wednesday after the Treasury Department announced changes to debt auctions as investors awaited the outcome of the Federal Reserve’s latest policy meeting.

Yields, which rise when bond prices fall, were fairly flat during the overnight session, with the 10-year yield briefly rising above 3% before falling again. They then maintained their range after the announcement by the Treasury, which revealed that it planned to slightly reduce the size of its fixed-rate note and bond auctions between May and July, after implementing cuts more significant in recent months.

The Treasury’s announcement was broadly in line with investor expectations, in line with recommendations from a private sector advisory committee.

In recent trades, the yield on the benchmark 10-year US Treasury was 3.005%, according to Tradeweb,

against 2.957% on Tuesday. The yield has climbed above 3% a few times this week without closing there, which it last did in November 2018.

The Treasury began to reduce the size of its debt auctions late last year as its borrowing needs dwindled. Wednesday’s decision to cut the auction in smaller increments comes as the Fed prepares to meet later in the day, when officials are expected to formally announce their intention to start cutting the portfolio. $9 trillion in central bank assets, including substantial holdings of Treasury securities.

The Fed is also expected to raise its benchmark federal funds rate by half a percentage point as it attempts to rein in inflation.

Despite the potential for Fed repurchases, strong tax revenues have reduced borrowing needs, enabling the further reductions in the size of coupon auctions announced Wednesday, according to a Treasury official. The Treasury said its issuance plans leave it well positioned to fund any borrowing needs that may arise from Fed repurchases and further cuts may be needed in coming quarters.

US markets indicate that investors expect inflation to decline from its current 40-year high, but its decline will be slower than previously thought. The WSJ’s Dion Rabouin explains why and what it could mean for Americans. Image: Spencer Platt/Getty Images

Treasury bill yields largely reflect investors’ expectations of what short-term interest rates will be during the life of a bond. But analysts say changes in the amount of Treasuries circulating in the market can also affect prices, with lower supply driving lower yields and higher supply pushing them higher.

Still, the Treasury’s announcement on Wednesday was “not particularly surprising,” wrote Benjamin Jeffrey, interest rate strategist at BMO Capital Markets, in a note to clients.

Later Wednesday, investors also expect some surprises when the Fed announces its interest rate decision. But there is keen interest in what Fed Chairman Jerome Powell will say at a later press conference.


Where do you think the yield on the benchmark 10-year Treasury note is headed?

Previous statements by Mr Powell have played a role in driving bond yields higher this year, as he repeatedly said tackling inflation was the central bank’s top priority and downplayed fears that rates would rise. higher will tip the economy into a recession.

On Wednesday morning, the target range for the federal funds rate was between 0.25% and 0.5%, while interest rate derivatives showed investors expect the rate to rise above 3% l ‘next year.

Higher rate expectations led to a brutal few months for bond investors, driving down prices of Treasuries, corporate bonds and municipal debt while boosting the 10-year Treasury yield by 1.496% at the end of last year.

The Bloomberg US Aggregate bond index – mostly US Treasuries, investment grade corporate bonds and mortgage-backed securities – has returned minus 9.9% this year as of May 3.

Write to Sam Goldfarb at [email protected] and Amara Omeokwe at [email protected]

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