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Bond Report: 10-year Treasury yield drops to lowest since April, curve stays deeply inverted after Fed’s second 75 basis point rate hike


Treasury yields turned broadly lower after the Federal Reserve delivered a widely expected 75 basis point interest rate hike on Wednesday, while the spread between the 2- and 10-year yields remained deeply negative in a worrisome sign for the economic outlook.

What yields are doing

The 2-year Treasury yield

declined 7.3 basis points to 2.968%, down from 3.041% at 3 p.m. Eastern on Tuesday. That’s the lowest level since July 6, based on 3 p.m. levels, according to Dow Jones Market Data.

The yield on the 10-year Treasury

fell 5.5 basis points to 2.731%, down from 2.786% Tuesday afternoon. That’s the lowest since April 13.

The spread between the 2- and 10-year yields narrowed to as little as minus 34 basis points during the sesson.

The 30-year Treasury bond yield

declined less than 1 basis point to 3% versus 3.008% late Tuesday.

What’s driving the market

The Federal Reserve concluded its two-day policy meeting on Wednesday, with policy makers lifting the fed-funds rate by 75 basis points, or three-quarters of a percentage point, as it continues to tighten monetary policy to rein in inflation running at an almost 41-year high.

See: Fed hikes rates by 0.75 percentage points and signals more hikes coming

The rate-setting Federal Open Market Committee issued a policy statement that said it “anticipates ongoing increases in the target range will be appropriate.” Wednesday’s rate hike takes the fed funds rate target to a range between 2.25% and 2.50%.

In his post-meeting press conference, Powell said a 75 basis point hike was judged to be the “right” magnitude for now, and that an “unusually large” increase could be appropriate at the next meeting depending on the data. He also said he doesn’t think the U.S. is currently in a recession and that the FOMC is “determined” to get inflation back toward 2%, a process which will involve a period of below-trend economic growth.

Meanwhile, traders have been talking about the possibility that Fed officials might deliver a rare, intermeeting rate hike in August, ahead of its next scheduled gathering in September, if inflation fails to ease.

Also read: Here’s the threat to markets if investors ignore ‘nontrivial’ stagflation risk

The Fed’s efforts to curb inflation have sparked fears the economy could see a sharp slowdown or tip into recession, with investors pricing in the prospect of rate cuts in 2023. The 2-year yield remains well above the 10-year, an inversion of the yield curve that has proven to be a reliable recession warning flag.

Need to Know: The Fed will cut rates next year, says BofA. Here’s what will happen to Treasurys.

In data released on Wednesday, U.S. June durable goods orders jumped  1.9% in June, but there were hints of weakness. The U.S. trade deficit in goods narrowed for a third straight month in June and pending home sales fell by 8.6% last month.

What analysts say

“Bear in mind that since the 50bp hike in May, Fed policy has been all about inflation, not growth. A slowdown, even a recession, might slow the tightening pace, but it will not stop the Fed from tightening until inflation is significantly lower,” Will Compernolle, senior economist at FHN Financial, wrote in an email.

“The Fed’s comments suggest the pace of rate hikes will slow considerably in the coming months,” said George Bory of Allspring Global Investments. “That said, Powell also mentioned they will no longer provide ‘clear guidance’ for future policy changes” now that the fed funds target range is closer to a neutral level. “Hopes for a slower pace of rate hikes pushed expectations for additional rate hikes lower, bond yields lower, credit spreads tighter and stock prices higher,” Bory wrote in an email.

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