Treasury yields dip in early trading

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Bond yields fell on Tuesday in cautious trading ahead of next week’s Federal Reserve policy meeting.

What’s happening

  • The yield on the 2-year Treasury
    TMUBMUSD02Y,
    4.457%

    eased by 1.2 basis points to 4.445%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    TMUBMUSD10Y,
    3.668%

    retreated 2.2 basis points to 3.666%.

  • The yield on the 30-year Treasury
    TMUBMUSD30Y,
    3.873%

    fell 1.9 basis points to 3.869%.

What’s driving markets

There are no economic data releases of note on Tuesday and no comments from Fed officials because the central bank has entered a quiet period ahead of its monetary policy meeting next week.

Markets are pricing in a 79.4% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.

The chances of a 25 basis point hike to 5.25% to 5.50% is in July is priced at 52.7%.

These probabilities are little changed from the start of the week and this is reflected in meagre moves in yields across U.S. bond maturities.

That was not the case in Australia, however, where 2-year government bond yields jumped 7 basis points to 3.844% after the central bank delivered a second surprise 25 basis point rate hike in a row.

What are analysts saying

Morgan Stanley has produced some early thoughts on what it expects from next week’s Federal Open Market Committee meeting:

“Regarding current conditions, we expect the FOMC statement to acknowledge some slowdown in economic activity (in line with the spirit of the Beige Book, which described activity as “little changed” but with two districts with moderate declines). Elsewhere we expect little change in current conditions ,e.g. inflation remains elevated, and job gains continue to be robust,” said the MS team led by Ellen Zentner, chief U.S. Economist,

“Regarding forward guidance, we expect the Committee to convey that the federal funds rate is likely to “remain above levels that are expected to prevail in the longer run for a substantial amount of time”.

“For the press conference: We expect the Chair’s press conference to be heavily focused on communicating that the Fed will be on hold for an extended period of time. The Chair will also likely emphasize that the FOMC stands ready to increase rates further if economic activity and inflation are not to come in line with the Fed’s expectations for more moderation. We would also expect the Chair to acknowledge that the range of views in the Committee as to what would be the appropriate next step has widened,” MS concluded.

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