Most Treasury yields were slightly lower Wednesday morning, following an aggressive selloff in the prior session that pushed the 2- and 10-year rates to about their highest in two years, as investors penciled in a risk of a 50-basis-point rate increase from the Federal Reserve in March.
What are yields doing?
The yield on the 10-year Treasury note TMUBMUSD10Y, 1.849% was at 1.858%, compared with 1.866% on Tuesday, which was its highest, based on 3 p.m. Eastern levels, since Jan. 8, 2020, according to Dow Jones Market Data. Yields and debt prices move opposite each other.
The 2-year Treasury yield TMUBMUSD02Y, 1.018% was at 1.031%, compared with 1.038% on Tuesday afternoon, which was the highest rate since Feb. 27, 2020.
The 30-year Treasury bond yield TMUBMUSD30Y, 2.172% traded at 2.178% versus 2.185% late Tuesday.
What’s driving the market?
A sharp Treasury selloff to begin the new year has pushed yields to pre-pandemic levels as investors look for the Fed to begin lifting interest rates in March, with some penciling in a potential half-point tightening at that time.
The Federal Reserve is seen using its meeting later this month to prepare ground for lifting rates at its following policy gathering in March.
The sharp rise in yields has been blamed for unsettling equity markets, triggering selling pressure for tech and other growth stocks, whose valuations are based on expectations for cash flow far into the future. When Treasury yields rise, the value of that future cash is discounted.
After Tuesday’s selloff, the tech-heavy Nasdaq Composite COMP, +0.63% was down more than 7% so far in the new year, while the S&P 500 SPX, +0.27% declined 4% over the same period and the Dow Jones Industrial Average was off 2.7%. Major U.S. stock-market indexes opened modestly higher on Wednesday.
Wednesday’s data releases showed that U.S. home builders started construction on homes at a seasonally adjusted annual rate of roughly 1.7 million in December, a 1% increase from the previous month. Housing starts were up 2.5%, compared with December 2020. Permitting for new homes occurred at a seasonally adjusted annual rate of 1.87 million, up 9% from November and 6.5% from a year ago.
What are analysts saying?
“The reason for the sharp increase in bond yields is the market’s growing expectation that the Federal Reserve will raise interest rates for the first time in the pandemic era in March, and follow this up with multiple hikes during the remainder of 2022,” said Matthew Ryan, senior market analyst at Ebury, in emailed comments.
“While it is too soon for the Fed to raise rates [at its January meeting], we now see a very good chance that policy makers will indicate a hike is on the way when the QE program draws to a close in two months time,” he said.