Bond yields rose on Monday as traders eyed the Federal Reserve’s rate setting decision due midweek.
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.486% rose by 8.7 basis points to 4.495%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 4.042% added 4.4 basis points to 4.060%.
- The yield on the 30-year Treasury TMUBMUSD30Y, 4.138% rose 1 basis point to 4.153%.
What’s driving markets
Benchmark bond yields were rising from two-week lows ahead of the Federal Reserve’s interest rate decision on Wednesday.
Yields had moved lower in recent sessions on hopes the latest economic data may allow the central bank to soon start slowing the pace of monetary tightening.
“Friday’s PCE inflation print was largely in line with expectations, while personal income and spending rose by more than expected in September, giving a potential double bonus of flattening inflation but also a resilient consumer. This comes even against the possibility of an enforced recession, which will continue to give the Fed food for thought,” said Richard Hunter, head of markets at Interactive Investor.
“For markets, the acid tests continue in a week which will contain both the Fed’s latest interest rate decision as well as the nonfarm payroll figures on Friday,” Hunter added.
Jim Reid, strategist at Deutsche Bank, suggested the bond market might be vulnerable to some renewed selling if hopes for a less aggressive Fed, which helped spark the latest rally, are dashed.
“A week with the latest FOMC and payrolls is unlikely to be dull, and could ‘spook’ the market, especially after a 10-day period that was mostly made of up dovish pivot talks,” said Reid.
Markets are pricing in an 87.7% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4.00% after its meeting on November 2nd. The central bank is expected to take its Fed funds rate target to 4.9% by April 2023, according to the CME FedWatch tool.
Traders must also contend with a Bank of England rate decision on Thursday, which “although less pivotal than it could have been a few weeks back [amid the “mini” budget bond-selling crisis] is still something that can influence global markets,” said Deutsche’s Reid.
Analysts also noted there was disappointing news from the grain sector that could make food inflation that bit more sticky.
“There had been hopes lower food commodity prices would feed through to lower grocery prices, but there has been a major upset to this trend, with grain prices showing signs of taking off again due to Russia suspending its participation in the Black Sea grain deal,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, in a morning note.
U.S. wheat futures W00, +5.61% trading in Chicago jumped 6% to $8.78 a bushel.