Treasury yields climbs after Fed’s Williams remarks

The slightest suggestion of an interest rate hike by a Federal Reserve official ended the US bond market’s rebound. John Williams, the president of the New York Fed, stated that another rate hike is not his base case on Thursday in answer to a question during a conference in Washington. However, he added, “We would obviously want to do that if the data are telling us that we would need higher interest rates to achieve our goals.”

Following the most recent US economic data, Treasury rates, which were already expected to rise, increased even further. The two-year yield led the rise, rising as much as 5 basis points to over 4.99%, which is close to the upper end of its recent range.

In reaction to robust economic statistics and statements from Fed officials during the last two weeks, Wall Street strategists and money managers were compelled to reconsider their presumptions.

Due to the bond market’s apparent endorsement of the Fed Chair Jerome Powell’s recent lowering of expectations for interest-rate cuts this year, the yield on policy-sensitive two-year Treasuries reached its highest point this week at just over 5%, the most since November.

Predictive swap rates, which value a cumulative 38 basis points of rate cuts by the December policy meeting, increased on Thursday compared to closing Wednesday at 43 basis points. Initial quarter-point cuts are still anticipated for the policy meeting in November.

The odds of a second Fed rate hike, after the eleven that occurred between March 2022 and July 2023, are still quite slim.

Protection against the likelihood of rates rising, or at least not decreasing, has been popular in the interest-rate options market.

Recent economic data pointing to a healthy labour market, persistent inflation, and better-than-expected retail sales have raised concerns about the Fed’s ability to implement the three quarter-point rate decreases it predicted in March.

According to Bloomberg data, a measure of Treasuries has handed investors losses of about 2% so far this month, wiping away March’s 1.3% gain.

However, some Wall Street observers see increased rates as a justification for purchasing. Indeed, on Wednesday, investors had rushed to a 20-year bond auction. Because the Fed is still in a position where they believe they have done enough, some economists believe there are limits to how much higher yields may increase.