Treasury yields hold above 5% ahead of Fed rate decision
U.S. Treasury yields held above 5% on Wednesday morning as investors waited for the Federal Reserve to announce its latest interest rate decision, which markets widely expect will be a quarter-point increase.
At 4:30 a.m. ET, the 10-year Treasury yield held steady at 5.004%, and the 20- and 30-year maturities sat at 5.409% and 5.372% in kind. The Federal Open Market Committee is set to announce its monetary policy decision at 2 p.m. ET.
According to the CME FedWatch tool, fed funds futures put the odds of a quarter-point hike at about 92.5%, a steep climb from approximately 33% just a month earlier. Should the Fed deliver the expected quarter-point increase, attention will quickly turn to what Chairman Kevin Warsh says at his post-decision press conference.
"At this stage, it would be very difficult for the Fed to leave rates unchanged this week without eroding its inflation-fighting credibility," Vail Hartman, U.S. rates strategist at BMO Capital Markets, said in a note, according to CNN .
Brent Wilsey, chief investment officer at Wilsey Asset Management, warned in a Wednesday note that a decision to hold rates steady could unsettle markets. "If the Federal Reserve were to keep rates steady Wednesday, that could surprise stocks, and surprises are rarely received well in markets," he said. "It could also damage the Fed's credibility, and reignite concerns that the central bank is caving to political pressure to keep rates steady."
The 10-year yield climbed above 5% for the first time since 2007 on Tuesday , touching an intraday peak of 5.041% before closing at around 5%. Friday's August CPI reading put annual inflation at 3.4%, and the most recent personal consumption expenditures index, the Fed's go-to price measure, showed a 3.7% year-over-year gain through July, while crude oil continues to trade north of $100 a barrel.
The sharp bond market selloff that pushed yields to multiyear highs reflects a confluence of pressures: heavier issuance from both corporations and the federal government, oil prices inflated by Middle East tensions, and deepening worries about the country's fiscal trajectory. The Fed's rate-hike odds climbed to around 90% after the August inflation report and have continued to rise heading into Wednesday's decision.
In a Wednesday note, Jonathan Pryor, co-head of FX dealing at Marex, argued that the Fed has entered a new phase. "Earlier in the year, it looked like we were entering into a rate cutting cycle that may last for six or twelve months, but now it feels like the tables have turned," he said, according to CNBC .
