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2-year Treasury yield registers biggest one-day drop in two years after Fed projections point to lower interest rates in 2024

The yield on 2-year Treasury bills on Wednesday saw its biggest one-day drop since February 2020, after Federal Reserve policymakers announced a 75 basis point rate hike, but signaled that the U.S. federal funds is expected to decline in 2024.

What Do Yields Do
  • The yield of the 2-year Treasury bills TMUBMUSD02Y,
    3.273%
    fell 16 basis points to 3.275% from 3.435% on Tuesday evening. This is the largest one-day decline in yield since Feb. 28, 2020, based on 3 p.m. levels, according to Dow Jones Market Data.

  • The yield of the 10-year Treasury note TMUBMUSD10Y,
    3.332%
    fell 9.3 basis points to 3.389% from 3.482% on Tuesday. This is the biggest one-day drop since May 24, but the 10-year yield still remains at its second-highest level this year.

  • The yield of the 30-year Treasury note TMUBMUSD30Y,
    3.359%
    fell 2.8 basis points to 3.404% from 3.432% on Tuesday.

What is driving the market?

As expected, US policymakers raised the federal funds rate by three-quarters of a percentage point, to between 1.5% and 1.75%, the largest hike in nearly 28 years. At his press conference, Powell told reporters that policymakers believe “front-loaded” rate hikes are needed, and that a 50 or 75 basis point hike is on the table for July. . He also said officials would look for compelling evidence that inflation is falling.

Policymakers were forced to act forcefully on Wednesday after last Friday’s surprise Consumer Price Index reading showed the headline annual inflation rate hit a 40-year high of 8, 6%.

Fed officials expect inflation, as measured by their preferred metric, to top 5% by the end of 2022 before falling to 2.6% in 2023 and 2.2% in 2024 , according to median estimates released on Wednesday. The Fed also expects a federal funds rate of 3.4% by the end of the year and 3.8% in 2023 to be the most appropriate path for the policy. After that, the rate is expected to decline to 3.4% in 2024 and 2.5% in the long term.

Data released on Wednesday showed U.S. retail sales fell 0.3% in May, the first drop since the end of 2021, due to a drop in auto purchases; higher prices may also have discouraged buyers. And the cost of imported goods rose 0.6% in May, fueling the biggest rise in U.S. inflation since the early 1980s.

In Europe, central bank policymakers surprised markets with a rare “ad hoc” meeting, which resulted in a pledge to tackle widening credit spreads. Borrowing costs have skyrocketed in Europe since the central bank announced at its recent June meeting that its key interest rate would rise by 25 basis points in July, and possibly a further increase. important in September.

Lily: Why the ECB called an emergency meeting as it battles the risk of ‘fragmentation’

What analysts say
  • “Markets were pricing in a 75 basis point rate cut and that’s what they got,” SLC Management’s Dec Mullarkey said in an email. “The Fed is clearly sensing the intensity of inflationary surprises and intends to remain aggressive. At this point, moves of 50 to 75 basis points are on the table for future meetings. »

  • “The Fed is pretty clear that it’s trying to stage a soft landing, and the market buys into the idea that early and aggressive Fed action will give policymakers more flexibility later this year. and early next year,” Tom Garretson, a senior portfolio strategist at RBC Wealth Management in Minneapolis, said over the phone.

  • “Markets are relieved that the Fed is trying to step in and manage inflation. But will it last? That remains to be seen,” Jon Maier, chief investment officer at Global X ETFs, said by phone. “I think the market pain will only end when investors see the end of the tightening cycle. This likely means we see more volatility, especially when next quarter earnings are released and you get guidance from companies on the state of consumer and supply chains.

  • “Following the release of strong CPI data on Friday (8.6% YoY), markets have been on a one-way train with Treasuries selling aggressively in anticipation of an aggressive FOMC to help combat rising inflation concerns,” Victor Masotti, head of repo trading at Clear Street, wrote in an email ahead of the release of the Fed’s policy statement. Fed policymakers are “stuck between a rock and a hard place as they face mounting inflation concerns in the current environment.”

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Post expires at 5:31am on Sunday June 26th, 2022