What happened

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  3.976%
  declined 19.8 basis points to 3.977% from 4.175% on Tuesday. During the prior session, it had jumped by the most in one day since June 5, 2009.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.482%
  fell 10.6 basis points to 3.497% from 3.603% as of late Tuesday.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.684%
  slipped 4 basis points to 3.694% from 3.734% Tuesday afternoon.

What drove markets

On Wednesday, Fed policy makers delivered their second quarter-of-a-percentage-point rate hike in a row, bringing the fed funds rate target to between 4.75% to 5%. Their median 2023 projection for the appropriate level of the target remained at 5.1%, giving markets reason to believe that no more than one more rate hike is in store.

See: Fed hikes interest rates again, pencils in just one more rate rise in 2023

During his press conference, Powell said the central bank will use all its tools to keep the banking sector safe and sound, and that it’s too soon to say how central bank policy should respond to the recent stress in the banking system. He said rate cuts aren’t in policy makers’ base-case scenario and that officials are committed to bring inflation back to the Fed’s 2% target.

Traders priced in a 53.1% chance of a pause in rate hikes in May and a 46.4% likelihood of another quarter-point hike in May that would take the fed funds rate to between 5% and 5.25%, according to the CME FedWatch tool. Meanwhile, the fed funds rate is mostly seen as ending the year at 4.25% and 4.5%, or lower, implying that traders still expect rate cuts even after Powell’s remarks.

The Fed’s decision follows a period of extreme volatility in bond markets as investors have tried to work out how much the central bank’s determination to curb inflation will be compromised by a desire not to exacerbate fractures in the banking system.

The ICE BoAML MOVE index, a gauge of expected Treasury volatility, slipped to 162.31 as of Tuesday but was still near one of its highest levels since the 2007-2009 financial crisis and recession.

The difficulties central banks are facing were illustrated by new inflation data from the U.K. on Wednesday. Ten-year gilt
TMBMKGB-10Y,
3.451%
yields rose 8.2 basis points to 3.451% after a report showed consumer-price rises accelerated to 10.4% year over year in February, a move seen cementing another 25-basis-point rate hike by the Bank of England on Thursday.

What analysts are saying

• “In my view, a 25bp increase shows the FOMC [Federal Open Market Committee] remains focused on achieving their long-term inflation target/price stability and remains relatively agnostic to certain other ramifications,” Shelby McFaddin, a senior analyst at Motley Fool Asset Management, said in an email to MarketWatch.

• “This is still an aggressive move given the current banking and debt crises,” said Thomas Smale, chief executive of Fe International. “Given the tightening of debt across sectors, this will only make economic growth more stagnant… Balance sheet cash will be king as debt has all but dried up for deals and existing borrowers are being increasingly squeezed on variable rates.”

• “There was some expectation that the median 2023 dot would move up and the fact that it didn’t came off as a bit dovish,” Blake Gwinn, head of U.S. rates strategy for RBC Capital Markets, said via phone. As for the reference in the Fed’s statement to the U.S. banking system as being “sound and resilient,” policy makers’ instinct is “to sound fairly confident on these things and that’s what they did.” Still, “they rightfully acknowledged” that recent developments are likely to produce tighter conditions for households and businesses and to weigh on economic activity.