Bond yields experienced a boost on Thursday as fixed income markets settled down in anticipation of the Federal Reserve’s upcoming rate hike.
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.815% increased by 2.1 basis points to 4.802%. (Yields move opposite to prices.)
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.791% rose 2.8 basis points to 3.783%.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.873% declined 2.1 basis points to 3.864%.
Key Factors Influencing Markets
As the Federal Reserve remains silent before its upcoming interest rate decision, traders are focusing on data releases to gather insight into the central bank’s future policy direction.
Notable U.S. economic updates slated for release on Thursday include the weekly initial jobless claims and the Philadelphia Fed manufacturing survey for June, both at 8:30 a.m. Eastern. Additionally, the June existing home sales and leading economic indicators will be published at 10 a.m.
According to the CME FedWatch tool, markets are expecting a 99.8% likelihood of a 25 basis point interest rate hike by the Fed at its meeting on July 26.
This high level of certainty has contributed to the ICE BofAML MOVE index, an indicator of expected Treasury market volatility, trading near its lowest level of the year, at 107. This is a significant decrease from the index’s peak of 200 during the U.S. regional banking crisis in March.
The Future of Interest Rates
According to 30-day Fed Funds futures, it is not anticipated that the central bank will reduce its Fed funds rate target back to approximately 5% until April 2024.
Upcoming Treasury Sale
In another development, the Treasury has announced the sale of $17 billion worth of 10-year TIPS, scheduled for 1 p.m.
Now, let’s dive into what analysts are saying about the situation.
Bank of America’s Insights
The economics team at Bank of America has shared their insights on what they expect Fed Chair Jerome Powell will address in his statement after the rate hike next week.
They anticipate Powell to convey four main messages during the press conference:
- Inflation Target: The committee is committed to taking necessary measures to bring inflation back to 2% over time.
- Balancing Act: While addressing inflation, the committee aims to avoid causing excessive harm to the economy. By gradually adjusting the policy rate, they can finely tune their stance.
- Further Action: The Chair is likely to hint at the possibility of additional rate hikes, based on projections from June where most members anticipated multiple hikes before the end of the year. This aligns with the guidance provided in the FOMC statement.
- Data Dependence: Finally, Bank of America expects Powell to emphasize that any future rate adjustments will be contingent on the available data. The Fed aims to remain flexible rather than being locked into a specific course of action.
It will be interesting to see how these predictions and messages play out as we await further updates from the Federal Reserve.