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Bond Report: 2-year Treasury yield extends rise as expectations grow for 75 basis point rate hike on Wednesday

The Treasury yield curve flattens Tuesday as expectations grow for the Federal Reserve to lift interest rates by75 basis points this week. Read More...

The yield on the 2-year Treasury note continued to rise on Tuesday as expectations grow for the Federal Reserve to lift interest rates by 75 basis points, or three-quarters of a percentage point, when it concludes its policy meeting this week.

Meanwhile, economic data released on Tuesday pointed to still-intense U.S. inflation and the Treasury curve continued to flatten.

What yields are doing
  • The 2-year Treasury note yield TMUBMUSD02Y, 3.300% rose to 3.318% from 3.279% Monday afternoon.
  • The yield on the 10-year Treasury note BX:TMUBMUSD10Y fell to 3.35%, down from 3.371% at 3 p.m. Eastern on Monday.
  • The yield on the 30-year Treasury bond TMUBMUSD30Y, 3.341% was 3.351% versus 3.368% late Monday.
  • Monday’s 3 p.m. levels were the highest for the 2-year note since Dec. 26, 2007, for the 10-year yield since April 21, 2011, and for the 30-year since Nov. 9, 2018.
What’s driving the market

On Monday, The Wall Street Journal reported that recent inflation reports were likely to lead Federal Reserve officials to consider surprising markets with a 75 basis point move on Wednesday, instead of a 50 basis point hike. In addition, economists at JPMorgan Chase & Co., Goldman Sachs, Barclays and Jefferies have also penciled in the possibility of a 75 basis point hike.

Read: JP Morgan, Goldman economists now expect Fed to raise rates by 75 basis points on Wednesday

Expectations for a larger hike come after last Friday’s surprise May consumer-price index reading that showed year-over-year inflation accelerated to a 40-year high of 8.6%. Evidence of still-intense inflation was also seen in Tuesday’s report on the cost of wholesale goods and services, which jumped 0.8% in May and added to mounting evidence that price pressures will persist through the summer.

The Treasury curve flattened on Tuesday, with the spread between the 2-year and 10-year Treasury yields reinverting again earlier in the day. A prolonged inversion of that part of the curve is typically seen as a recession warning signal, albeit with a lag.

Stocks opened modestly higher on Tuesday, a day after a sharp rise in real, or inflation-adjusted, yields was blamed for adding to carnage in the equity market, with major indexes plunging Monday and the S&P 500 SPX, -0.11% confirming its entry into a bear market.

The NFIB Small Business Optimism Index decreased marginally to 93.1 in May from 93.2 in April, the lowest level since April 2020, according to data released Tuesday by the National Federation of Independent Business. The reading was broadly in line with economists’ expectations in a poll by The Wall Street Journal.

What analysts say

“Following the dynamic moves of the past two trading days, money markets now see a more-than-even probability that the Fed will announce a 75bp rate increase after the end of the FOMC’s two-day meeting that starts today,” wrote economists at UniCredit Bank, in a note.

“Further down the road, money-market forwards suggest a peak level of the fed funds target rate in the vicinity of 4%,” they wrote. “We hold on to our view that the Fed will stick to its script of 50bp rate increases at this week’s and the upcoming FOMC meeting in late July as we regard such a path as sufficiently steep to tighten financial conditions.”

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