A steep Treasury market selloff continued Monday, with the yield on the 10-year Treasury note rising to the 3% threshold for the first time since December 2018 as investors prepared for the Federal Reserve to deliver an outsize rate increase and announce the beginning of the unwind of the central bank’s almost $9 trillion balance sheet later this week.
What are yields doing?
The yield on the 10-year Treasury note
rose 11 basis points to trade at 2.995%, its highest close based on 3 p.m. Eastern levels since Nov. 30, 2018, according to Dow Jones Market Data, after earlier breaching the 3% threshold for the first time since Dec. 3, 2018. Yields and debt prices move opposite each other.
The 2-year Treasury note yield
rose 3.3 basis points to 2.729%, its highest since Dec. 14, 2018.
The yield on the 30-year Treasury bond
jumped 11.5 basis points to 3.06%, its highest since March 16, 2019.
What’s driving the market?
Yields on 5-, 7-, and 20-year Treasurys also rose above 3% on Monday.
Fed policy makers will conclude their two-day meeting on Wednesday afternoon. Investors widely expect the central bank to raise the fed funds rate by 50 basis points, or half a percentage point, rather than deliver the typical quarter-point move. Investors have also been weighing whether further outsize rate moves are likely in coming policy meetings.
At that time, the Fed is also expected to announce the wind-down of its balance sheet.
Data released on Monday showed the final April reading of the S&P Global U.S. manufacturing purchasing managers index at 59.2 versus an initial reading of 59.7.
The Institute for Supply Management’s April manufacturing index also came in at 55.4%, below the 57.8% expected by economists surveyed by The Wall Street Journal. That was the slowest pace in 18 months, although a reading of more than 50% still signals an expansion in activity.
What analysts are saying?
“There doesn’t seem to be much room for [Fed Chairman Jerome] Powell to surprise on the hawkish side. However, tough comments with regard to recent wage developments could spark market speculation about a 75 [basis point] rate hike at one of the coming FOMC meetings,” wrote economists at UniCredit, in a note.
“If a 75bp rate hike becomes a viable option following this week’s FOMC meeting, fixed income and equity markets are probably in for another wild ride over the coming days,” they said.