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Bond Report: Treasury yields rise as Federal Reserve’s two-day policy meeting gets under way

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Yields for U.S. government debt were higher across the board Tuesday morning as the Federal Reserve kicked off its two-day policy meeting, which concludes on Wednesday.

Data released on Tuesday showed that U.S. consumer confidence slipped in January, though remained above forecasts, while home price rises in 20 major U.S. metropolitan areas leveled off late last year.

What are yields doing?
  • The 10-year Treasury note TMUBMUSD10Y, 1.756% yields 1.753%, up from 1.735% at 3 p.m. Eastern Time on Monday, when the yield fell to its lowest since Jan. 13.
  • The 2-year Treasury note rate TMUBMUSD02Y, 1.008% was at 0.997%, up from 0.950% a day ago.
  • The 30-year Treasury bond yield TMUBMUSD30Y, 2.098% was at 2.097% versus Monday’s 2.083% level.
What’s driving the market?

The Fed’s rate-setting meeting began on Tuesday and comes as equities resumed their slide amid highly volatile trading over the past week as anticipation grows for more hawkish monetary policy.

The central bank’s policy-setting Federal Open Market Committee is expected to lay the groundwork for a benchmark interest rate increase in March, and to further discuss how fast it will shrink its balance sheet once it is ready to do so.

Minutes of the Fed’s December meeting, released early this month, surprised the market with just how much policy makers had already discussed shrinking the central bank’s nearly $9 trillion balance sheet.

Read: Forget Rate Hikes. How the Fed Handles Its $9 Trillion in Assets Is What Really Matters.

Policy makers will likely keep in mind the past bout of market volatility, which resulted in a surge in yields and turbulence in stocks, that followed a spring 2013 signal that the central bank was preparing to wind down the asset-buying program put in place during the 2008 financial crisis.

Market-based projections show that investors are anticipating that the Fed will raise rates, which stand at a range between 0% and 0.25%, three or four times in 2022.

Fed-funds futures show traders also see a roughly 5% chance of a 50-basis-point, or 0.5 percentage point, hike, rather than a 25-basis-point move, by the Fed at the March meeting, according to the CME FedWatch tool

In U.S. economic reports on Tuesday, the  S&P CoreLogic Case-Shiller 20-city price index posted a 18.3% year-over-year gain in November, down slightly from 18.5% the previous month. Home-price growth is seen as being at a turning point amid rising mortgage rates, with last summer’s breakneck pace not likely to be repeated in the coming months. The Case-Shiller national home price index demonstrated 18.8% growth between 2020 and 2021 in November, also down from the prior month.

Meanwhile, U.S. consumer confidence fell to 113.8 in January from a revised 115.2 the prior month, though the January figure was still above the median forecast of economists polled by the Wall Street Journal.

Later in the session, an auction of $55 billion in 5-year Treasury notes TMUBMUSD05Y, 1.544% at 1 p.m. will be watched for its influence on yields.

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What analysts are saying

Fed policy makers “really need to get their arms around the balance sheet and what the plan is there, in order to not do any preemptive tightening, and come to a mind meld about what they are doing in March and whether a 50-basis-point rate hike is on the table,” said Greg Staples, head of fixed income in North America for DWS Group in New York. “They’re not going to want to commit way too soon.”

“The balance sheet would impact inflation and be far more effective in terms of mortgage rates than hiking would be,” Staples said via phone. “They could signal there will be no more reinvestment in agency MBS or choose to sell those assets, which would impact the longer end of the curve — whereas a 25- or 50-basis-point hike in the fed funds rate would affect the front end.”

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