The yield on the 2-year Treasury note extended its rise Tuesday as expectations grew 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.
What yields are doing
- The yield on the 10-year Treasury note TMUBMUSD10Y, 3.325% fell to 3.301%, down from 3.371% at 3 p.m. Eastern on Monday.
- The 2-year Treasury note yield TMUBMUSD02Y, 3.317% rose to 3.288% from 3.279% Monday afternoon.
- The yield on the 30-year Treasury bond TMUBMUSD30Y, 3.331% was 3.305% versus 3.368% late Monday.
- The yield on the 2-year note late Monday was the highest 3 p.m. level since Dec. 26, 2007, while the 10-year yield was the highest since April 21, 2011, and the 30-year was the highest since Nov. 9, 2018.
What’s driving the market
Investors and economists have boosted expectations for the Fed to raise its benchmark interest rate by three-quarters of a point when policy makers conclude their meeting on Wednesday. Fed Chair Jerome Powell had previously said half percentage point moves were on the table for June and July after the Fed delivered a half-point rise in May.
Expectations for a larger hike have followed a surprise May consumer-price index reading on Friday that showed year-over-year inflation accelerated to a 40-year high of 8.6%.
The Wall Street Journal on Monday reported that recent inflation reports were likely to lead Federal Reserve officials to consider surprising markets with a 75 basis point move. Several economists had also penciled in the possibility of a 75 basis point hike after the May CPI reading.
On Monday, JPMorgan Chase & Co. economist Michael Feroli pointed to the “startling rise in longer-term inflation expectations” in a Friday consumer sentiment report and The Wall Street Journal article as he raised his forecast for this week’s move to a 75 basis point hike. Economists at Goldman Sachs also called for a 75 basis point move.
Read: JP Morgan, Goldman economists now expect Fed to raise rates by 75 basis points on Wednesday
The 2-year Treasury yield came within a whisker of topping the 10-year rate on Monday, threatening to re-invert that measure of the yield curve. The 2-/10-year yield curve briefly inverted in late March and early April. A prolonged inversion of that measure of the curve is viewed as a recession warning signal.
Meanwhile, the sharp rise in real, or inflation-adjusted, yields was blamed for adding to carnage in equity market, with major indexes plunging Monday and the S&P 500 SPX, -3.88% 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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