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Bond Report: 2-year Treasury yield has biggest one-day drop in two years after Fed projections point to a pullback in interest rates in 2024

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Treasury yields remained broadly lower Wednesday afternoon after Federal Reserve policy makers raised their main policy rate target by 75 basis points for the first time since November 1994.

What are yields are doing

The 2-year Treasury note yield 
TMUBMUSD02Y,
3.247%

fell to 3.428% from 3.435% late Tuesday, which was its highest level since Nov. 14, 2007, according to Dow Jones Market Data. Wednesday’s drop comes on the heels of the largest eight-day yield rise for the 2-year note since Aug. 14, 1989, as of Tuesday.

The yield on the 10-year Treasury note 
TMUBMUSD10Y,
3.382%

 dropped to 3.443% from 3.482% on Tuesday, which was the highest level since April 14, 2011. As of Tuesday, the yield had seen its biggest five-day rise since Oct. 14, 2008.

The yield on the 30-year Treasury bond 
TMUBMUSD30Y,
3.386%

 slipped to 3.424% from 3.432% on Tuesday. Tuesday’s level was the highest since Nov. 2, 2018.

What’s driving the market?

As expected, U.S. policy makers lifted the fed funds rate by three quarters of a percentage point, to between 1.5% and 1.75%, a hike of the biggest magnitude in almost 28 years. Investors turn their attention next to Fed Chairman Jerome Powell’s press conference, due at 2:30 p.m. New York time.

While some fear more aggressive action could trigger a recession, the Fed is under pressure to act forcefully after last Friday’s surprise May consumer-price index reading, which showed the annual headline inflation rate surging to a 40-year high of 8.6%. In addition, prices of wholesale goods and services jumped 0.8% in May, Tuesday’s data showed.

And: In `fragile’ financial markets ahead of Fed’s decision, some traders and strategists see risk of instant recession

Data released on Wednesday showed that U.S. retail sales fell 0.3% in May, the first decline since the end of 2021, on fewer auto purchases; rising prices may have also discouraged shoppers. And the cost of imported goods rose 0.6% in May, feeding into the largest increase in U.S. inflation since the early 1980s.

In Europe, central bank policy makers surprised markets with a rare “ad hoc” meeting, which produced a commitment to fight widening bond spreads. Borrowing costs have soared in Europe since the central bank announced at its recent June gathering that its key interest rate would rise 25 basis points in July, and possibly by a larger increment in September. 

What analysts are saying

“After Friday’s strong CPI data release (8.6% YoY), markets have been a one-way train with Treasuries aggressively selling off in anticipation of an aggressive FOMC to help combat rising inflation concerns,” Victor Masotti, director of repo trading at Clear Street, wrote in an email before the Fed’s policy statement was released.

Fed policy makers are “stuck between a rock and a hard place as they are faced with rising inflation concerns in this current environment,” Masotti said. “They will be aggressively tightening rates throughout 2022, but at risk of needing to unwind these hikes and begin cutting rates as early as 2023 to offset the looming recession. The risk of `over-tightening’ is now a strong concern.”

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