Bond Yields Rise on Hawkish Fedspeak

Bond yields saw an increase on Monday following some hawkish comments made by Federal Reserve Governor Michelle Bowman. This has prompted speculation about the possibility of higher interest rates in the future.

Yield Movement

  • The yield on the 2-year Treasury BX:TMUBMUSD02Y rose by 5.4 basis points to 4.387%. Remember, yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury BX:TMUBMUSD10Y increased by 5.7 basis points to reach 4.103%.
  • The yield on the 30-year Treasury BX:TMUBMUSD30Y climbed by 4.8 basis points, reaching 4.248%.

Hawkish Talk from Bowman

Bowman’s relatively hawkish talk during the weekend suggests that the central bank may need to raise interest rates even further in order to bring inflation levels down to a more acceptable range. This comes after recent labor data revealed a slowdown in job growth but with elevated wage inflation, indicating that inflationary pressures are still present in the economy.

Market Expectations

According to the CME FedWatch tool, the market is currently pricing in an 85% probability that the Federal Reserve will maintain interest rates at their current range of 5.25% to 5.50% after the next meeting on September 20.

Additionally, there is a 30% chance of a 25 basis point rate hike to a range of 5.50% to 5.75% at the subsequent meeting in November.

The Future of the Fed Funds Rate

According to 30-day Fed Funds futures, it is not expected that the central bank will lower its Fed funds rate target to around 5% until May 2024.

Increased Supply and Yields

Concerns about increased supply have also contributed to the rise in yields. The Treasury announced last week that it would need to issue $1 trillion of paper in the third quarter.

Analysts’ Perspectives

Mixed Reactions to Recent Releases

“We had two U.S. payrolls and two inflation releases to get through before the next FOMC in September and although the first of these on Friday was a mixed affair, it did trigger a big rally across the U.S. rate curve with 2yr and 10yrs -11.7bps and -14.1bps tighter, respectively, on the day even if yields were still higher at the long-end on the week,” said Jim Reid, strategist at Deutsche Bank.

Focus on U.S. CPI

“So next stop is U.S. CPI on Thursday. One thing to bear in mind for inflation over the next few months is the +15.8% gain in the WTI crude price last month. Gasoline prices are rising fast too. Too early perhaps to make much inroads yet but a complication if prices stay elevated,” Reid added.

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