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28 Sep, Thursday
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Bond Report: Treasury yields rise across the board as Fed reaffirms expectations for March rate hike

Yields on U.S. government debt climbed further on Wednesday, led by 3- and 7-year Treasury maturities, after Federal Reserve Chairman Jerome Powell said the central bank could raise benchmark interest rates in March and may shrink its balance sheet at a faster pace than in the previous cycle.

In a statement released earlier Wednesday, Fed officials said a rate hike is expected to “soon be appropriate” and chose not to accelerate the pace of tapering their asset purchases, which are set to end in March.

What are yields doing?

The 10-year Treasury note TMUBMUSD10Y, 1.837% yields 1.843%, compared with 1.784% on Tuesday at 3 p.m. Eastern Time.
The 2-year Treasury note TMUBMUSD02Y, 1.099% rate sits at 1.08%, versus 1.025% on Tuesday, based on new issuance levels.
The 30-year Treasury bond TMUBMUSD30Y, 2.162% yields 2.181%, up from 2.129% on Tuesday afternoon.

What’s driving the market?

Yields turned higher during Powell’s press conference even though the Fed chairman said policy makers haven’t made any decisions on the path of future rate hikes, and that they will make final choices on shrinking the central bank’s almost $9 trillion balance sheet at “upcoming meetings.”

In a statement released before the press conference, Federal Reserve officials held the fed funds rate target between zero and 0.25%, but said they expect “it will soon be appropriate to raise the target range for the federal funds rate,”  without committing to a move in mid-March. They also decided to continue reducing the monthly pace of asset purchases, bringing them to an end in early March.

In a separate release, the policy-setting Federal Open Market Committee reaffirmed its “Statement on Longer-Run Goals and Monetary Policy Strategy,” saying it expects that shrinking the Fed’s balance sheet will begin after the process of raising rates has started.

Read: Stock-market investors can’t count on the ‘Fed put’—why policy makers aren’t seen rushing to rescue

In U.S. economic reports, the U.S. trade deficit in goods topped $1 trillion in 2021 for the first time ever, as Americans snapped up a record amount of imports such as toys, cellphones and appliances. Meanwhile, new-home sales jumped nearly 12% in December to an 811,000 annual rate as supply shrunk, with buyers snatching up whatever inventory they could find.

Wednesday’s $26 billion auction of two-year floating-rate notes produced a strong indirect bid, according to Jefferies economists Thomas Simons and Aneta Markowska.

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What strategists are saying

“As widely expected, the Fed’s updated statement did little more than to prepare markets for a forthcoming rate hike in March, but given that markets have been prepared for such a move for some time, it was little more than a formality,” said Tom Garretson, a senior portfolio strategist for RBC Wealth Management.

“Notably, the Fed didn’t see cause to accelerate the pace of its asset purchase tapering timeline, still scheduled to end in early March,” which sparked “a bit of a relief rally in markets” soon after the FOMC’s statement was released, Garretson wrote in an email to MarketWatch.

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