Benchmark U.S. bond yields turn mixed as investors reassess Fed’s trajectory

U.S. bond yields turn mixed Tuesday morning, with the 2-year falling and the 10-year yield holding steady, as investors readjusted their expectations for Federal Reserve interest rate hikes.

What’s happening
  • The yield on the 2-year Treasury
    was 3.268% versus Monday’s level of 3.335%.

  • The yield on the 10-year Treasury
    was barely changed at 3.036% compared with 3.035% on Monday afternoon.

  • The yield on the 30-year Treasury
    rose to 3.275% from 3.241% on Monday.

What’s driving markets

Bond yields were holding above 3% across the board on Tuesday, with traders expecting Fed Chair Jay Powell to ram home his colleagues’ hawkish message when he speaks at the central bank’s Jackson Hole symposium on Friday.

A flurry of Fed officials in recent weeks have reiterated that they will persevere in the battle to push inflation, currently 8.5%, down to the target of 2%.

Read: Why the 10-year yield topping 3% can hurt stocks

On Monday, the 2-year yield hit its highest level since June 14, while the 10- and 30-years reached their highest yield in a month or more based on expectations that the Fed may be more hawkish in its monetary policy tightening than previously thought.

Markets are pricing in a 53.5% probability that the Fed will raise interest rates by another 50 basis points to a range of 2.75% to 3% at its Sept. 20-21 meeting. Traders see a more than 50% chance that the central bank will take its borrowing costs to at least between 3.5% and 3.75% by next March, according to the CME FedWatch Tool.

U.S. economic data released on Tuesday showed that the S&P’s purchasing managers’ manufacturing and services indexes each dropped in August, to 51.3 and 44.1 respectively, while new home sales came in below economists’ median expectation for July.

The Fed’s preferred inflation measure, the PCE price index, will be published on Friday.

The U.S. Treasury will auction $44 billion of 2-year bonds at 1 p.m. Eastern.

Meanwhile, in Europe, the German 10-year bund yield
is up 2.6 basis points to 1.335% as investors absorb news that a eurozone purchasing managers’ gauge weakened to an 18-month low as record high energy costs fuel inflation fears.

What analysts are saying

“We are looking for a hawkish message this week from the Fed’s Jackson Hole,” said trader Tom di Galoma of Seaport Global Holdings. “I look for the Fed to raise rates 75bps at the September 21st Fed meeting” and hold off on hikes on Nov. 2 due to U.S. mid-term elections on Nov. 8, he wrote in a note.

Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.

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