Bond Report: Treasury yields edge up as investors await Fed decision

U.S. Treasury yields on Wednesday climbed slightly ahead of a policy update from the Federal Reserve, with its Chairman Jerome Powell scheduled to hold a news conference at 2:30 p.m. Eastern Time about the economic recovery from COVID-19, following an updated Fed statement and projection of future interest rates from policy makers a half-hour earlier.

What Treasury yields are doing
  • The 10-year Treasury note yields

    edged up to 1.332%. from 1.323% on Tuesday at 3 p.m. Eastern Time.

  • The 30-year Treasury bond rate

    stands at 1.869%, versus 1.857% a day ago.

  • The 2-year Treasury note yield

    is at 0.222%, compared with 0.214% Tuesday.

What’s driving the market?

Fed chair Powell is expected to focus on articulating a timetable for reducing monthly purchases of $120 billion in Treasurys and mortgage-backed securities,

However, fixed-income investors may be more concerned about the outlook for interest rates, given expectations that the conclusion of tapering will eventually be followed by a push to normalize benchmark borrowing costs, which currently stand at a range between 0% and 0.25%.

The Fed’s dot plot, or outlook for interest rates, for the first time will include 2024 projections, which will shed more light on the planned pace of rate increases.

Concerns about the impact of the delta variant of COVID-19 on the labor market and the sustainability of inflation, could be sources of discussion for Powell during his news conference with the media later Wednesday.

The potential impact of disruptions out of China, sparked by worries about property developer Evergrande, could also be obliquely referenced in the Fed’s policy statement if not addressed outright during Powell’s Q&A.

A selloff in stocks, leading to some Treasury buying earlier in the week, partially fueled by Evergrande concerns, has abated somewhat. The Wall Street Journal reported that Evergrande’s property business would make an interest payment on an onshore bond due on Thursday. However, the embattled property developer has a payment due next week as well, among its $300 billion in debt, which has raised worries about financial contagion if the Chinese government doesn’t intervene to bailout the company.

So far, a number of analysts have expressed doubts that Evergrande’s financial issues will ripple through other parts of the globe.

There also has been some unconfirmed speculation that theEvergrande conglomerate will pursue a restructuring that will see it split into three companies.

Meanwhile, fixed-income investors will be also be closely watching news out of Washington, after the House passed legislation Tuesday night to potentially avoid a government shutdown and suspend the debt ceiling until December 2022. However, it isn’t clear that that legislation will get much traction among Republican members of the Senate, keeping intact doubts about Treasury debt limit standoff.

The government’s current funding expires at 12:01 a.m. ET Oct. 1. The Treasury Department is currently using emergency measures to service debt until the debt limit is raised or suspended again.

What analysts are saying

“We are expecting the Fed to say they are close to tapering however leaving a formal announcement for December. We also expect the dot-plot projections to raised be slightly,” wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, in a Wednesday note.

This post was originally published on Market Watch

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