Treasury yields nudged higher Wednesday as traders awaited a decision by the Federal Reserve that’s expected to see policy makers agree to more quickly wind down monthly bond purchases, setting the stage for a potential interest rate increase by spring.
What are yields doing?
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The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.440%
rose to 1.450%, up from 1.437% at 3 p.m. Eastern on Tuesday.
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The 2-year Treasury yield was at 0.665%, compared with 0.657% late Tuesday.
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The 30-year Treasury bond
TMUBMUSD30Y,
1.824%
yielded 1.838%, up from 1.818%.
What’s driving the market?
Investors widely expect the Fed to cut its monthly asset purchases more aggressively than previously planned, bringing its buying program to a halt by March rather than June. That would allow the Fed, which isn’t expected to raise interest rates until it has halted the purchases, to begin the hiking process earlier than expected.
Read: 5 things to watch for when the Federal Reserve announces its policy decision Wednesday
As a result, investors will also be paying close attention to the so-called dot plot that tracks rate expectations of individual policy makers and is expected to show a consensus for multiple rate increases in 2022. In September, the dot plot penciled in only one rate rise next year, though the majority of market participants in surveys expect two hikes. The projections showed a gradual hike in the fed-funds rate to only 1.8% at the end of 2024.
The Fed will release a policy statement at 2 p.m. Eastern, followed by Chairman Jerome Powell’s news conference at 2:30 p.m.
See: Uncomfortable question looming for the Fed: How much added unemployment will be needed to cool inflation down?
Ahead of the Fed decision, data released on Wednesday shows that U.S. retail sales climbed a tepid 0.3% in November, less than the 0.8% rise expected by economists polled by the Wall Street Journal. Meanwhile, the U.S. import price index jumped 0.7% last month, contributing to the highest rate of U.S. inflation in almost 40 years.
And the New York Fed’s Empire State business conditions index rose 1 point to 31.9 in December. Economists had expected a reading of 25, according to a survey by The Wall Street Journal.
A December home builders’ index is slated for release at 10 a.m.
What are analysts saying?
“Faster tapering opens up the possibility of earlier rate hikes, but there is probably still some way to go before the Fed can claim ‘maximum employment’ (a precondition for the first rate hike) has been reached,” wrote analysts at UniCredit, in a note. “We think the ‘dot plot’ will indicate two 25 [basis point] hikes next year (which contrasts with September, when the FOMC was split between one hike and none by the end of 2022), while keeping three hikes in each of 2023 and 2024.”
Read: The risk of a broader inversion in the Treasury yield curve is on the radar heading into 2022
