US government bond yields soared on Wednesday after the Federal Reserve said it would raise short-term interest rates and signaled they could reach nearly 2% by the end of the year.
The benchmark 10-year US Treasury yielded 2.239% in recent trading, up from 2.160% on Tuesday, according to Tradeweb. The 2-year Treasury yield, which is particularly sensitive to changes in monetary policy, was 1.989% recently, up from 1.855% on Tuesday.
Yields, which rise when bond prices fall, rose higher early in the session but added to that gain just after the Fed released its latest policy statement that said the central bank would raise its federal funds benchmark rate by a quarter. percentage point. up to a range of 0.25% to 0.5% of zero. The interest rate outlook showed that officials believe rates could rise to around 1.9% by the end of 2022 and to 2.8% by the end of next year.
The Federal Reserve’s primary tool for managing the economy is changing the federal funds rate, which can affect not only the cost of borrowing for consumers, but broader decisions of companies, such as how many people to hire. The WSJ explains how the Fed manipulates this single rate to drive the entire economy. Illustration: Jacob Reynolds
On Wednesday, yields rose substantially in recent sessions to their highest level since 2019 as investors brace for a new monetary tightening regime.
This year has not been an easy one for bond investors. When inflation started picking up last year, investors thought for several months that it might come down on its own, allowing the Fed to keep short-term interest rates near zero. Those views, however, have changed rapidly this year, largely due to a change in tone on the part of Fed officials who have begun to express more worries about inflation and a desire to start raising rates.
This year, a significant rise in bonds came at the end of February when Russia invaded Ukraine for the first time, causing uncertainty about the economic outlook.
SHARE YOUR THOUGHTS
Is the Fed doing enough to fight inflation? Join the discussion below.
Recently, however, investors have become more skeptical that the invasion could keep interest rates down. Some argue that higher commodity prices caused by the invasion could only fuel inflation further, putting even more pressure on the Fed to tighten policy. Meanwhile, energy prices have already eased from recent highs, thanks in part to hopes for a negotiated settlement between Russia and Ukraine. This eased the fears of those who believed that higher prices could have the opposite effect of slowing economic growth and making it harder for the Fed to raise rates.
The Fed was almost certain on Wednesday that it would raise its target overnight interbank rate by a quarter of a percentage point to 0.25-0.5%. As a result, investors are primarily focused on the Fed’s so-called Dot Chart, which shows how individual officials expect rates to change over the next few years. They will also gauge the general tone of Fed Chairman Jerome Powell’s press conference to see if officials are becoming even more concerned about inflation.
Regardless of what officials say on Wednesday, monetary policy – and therefore bond yields – will continue to be largely determined by the health of the economy.
subscribe to news
Real Time Economy
The latest economic news, analysis and weekday data are curated by Jeffrey Sparshott of the WSJ.
On that front, new data showed Wednesday morning that retail sales rose a seasonally adjusted 0.3% in February, below analysts’ forecasts of a 0.4% increase. At the same time, January sales were revised upward to 4.9% from 3.8%.
Treasury bond yields have changed little since the report. In a note to clients, Jan Lingen, head of US rate strategy at BMO Capital Markets, wrote that the data showed a “worrisome trajectory” but that an upward revision in January sales “softened disappointing February data.”
Write to Sam Goldfarb at [email protected]
Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8