Treasury yields fall as Wall Street focuses on Fed and inflation outlook

U.S. government bond yields were down slightly on Wednesday morning ahead of the conclusion of the Federal Reserve’s policy meeting, which could help set the tone for inflation expectations for fixed-income investors.

How Treasury Yields Behave
  • The yield of the 10-year Treasury bill TMUBMUSD10Y,
    was 1.503%, down from 1.498% by 3 p.m. EST Tuesday. Yields fall as prices rise.

  • The 30-year Treasury bill TMUBMUSD30Y,
    yielded 2.201%, against 2.199% a day ago.

  • The 2-year Treasury note TMUBMUSD02Y,
    The rate was 0.161%, down from 0.165% on Tuesday, which was its highest level since May 12, according to Dow Jones Market Data.

Bond market drivers

It could be a big day for the US Treasury market.

Yields on benchmark U.S. government debt have mostly fallen amid data that increasingly reflects an economy recovering from the coronavirus pandemic. In fact, the 10-year Treasury, used to set rates on everything from auto loans to mortgages, is down about 1.62% at the end of the last Fed meeting in late April, data shows. from FactSet.

The decline in yields is curious given recent evidence of inflation percolating. The consumer price index in May hit a 13-year high of 5%. High inflation is anathema to treasury bills because it can erode the fixed value of a bond.

Some analysts have attributed the drop in yields to growing appetite for Treasuries outside the United States and money market funds hungry for richer yields in a world where yields close to 0% have become more common.

Wednesday’s Fed meeting will likely shed more light on the Fed’s tactical approach to ultimately reverse its quantitative easing measures, which had helped ease the pressures that developed during the height of the market disruptions induced by the Fed. the pandemic last year. Some have argued that the $ 120 billion in asset purchases per month are less needed and that the $ 40 billion in mortgage-backed securities purchases come at a time when the housing market appears to be in. overheated.

The Fed will release its updated policy statement and interest rate projections at 2 p.m. EST, and a question-and-answer session led by President Jerome Powell will take place half an hour later.

Investors will be watching closely the language of the statement for clues about the timing of a possible decline in quantitative easing and the opinion on both inflation and the overall health of the economy.

What strategists and traders say

“Which would be nice too, but we won’t get it, is Jay Powell’s explanation of the direct and empirical benefit of QE for the economy.” I don’t believe there is and it remains just a tool for the US Treasury to finance its deficits and a psychological boost to asset prices, ”wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a commentary. research note Wednesday.

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