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Bond Report: Treasury yields edge up in choppy trade after Fed signals no interest rate hikes through 2023

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U.S. Treasury yields edged up Wednesday in choppy trade after the Federal Reserve’s policy update showed senior central bankers expected a rate hike until the end of 2023, one year later than the market’s expectations.

What are Treasurys doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.631%

climbed 4.1 basis points to 1.664%, after hitting its highest levels since Jan. 2020, while the 2-year note rate
TMUBMUSD02Y,
0.129%

was down 1.2 basis points to 0.139%. The 30-year bond yield
TMUBMUSD30Y,
2.428%

gained 6.1 basis points to 2.455%, around its highest since November 2019. Bond prices move inversely to yields.

What’s driving Treasurys?

The Fed released its policy statement and updated economic projections on Wednesday. The so-called dot plot showed members of the Fed’s rate-setting committee expected the central bank to keep rates on hold through 2023.

The projections showed inflation  2021 PCE inflation estimate to 2.4% from 1.8%, but then sliding back to around 2% in the following year.

It suggested the central bank still saw the inflationary impulse from Joe Biden’s $1.9 trillion stimulus bill may be fleeting, and unable to prompt the central bank to hike rates materially under its average inflation targeting framework, or AIT, which specifies the Fed will only raise rates once it stays substantially over 2% for a sustained period.

Since the Fed last released forecasts in December, the yield on ten-year Treasury bonds has risen by over 0.7 percentage points as investors have priced in higher interest rates and inflation.

In U.S. data Wednesday, housing starts ran at an annualized pace of 1.42 million, a drop of over 10% in February. Building permits saw a similar drop to a 1.68 million pace.

What did market participants say?

“There is no indication that the Fed is shifting its stance toward a more hawkish bias and its statement is largely unchanged in its direction and guidance,” said Steven Oh, global head of credit and fixed income at PineBridge Investments. “The markets pricing of rate hikes in 2023 is counter to the Fed’s dot plot forecasts.”

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