U.S. 2-year yield at 19-month high, curve flattens
U.S. short-term Treasury yields rose further on Wednesday, causing the yield curve to flatten, as the possible timing of the Fed’s first interest rate rise came into tighter focus.
In the run-up to the Federal Reserve’s policy meeting next week, market focus has moved beyond just pricing in the central bank’s likely taper of asset purchases and onto the timing of the first rate rise since December 2018.
Rising oil prices and inflation expectations have fed into that pricing. The Fed has signaled it will possibly begin next month to taper its $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities, but Chair Jerome Powell said last week it wasn’t yet time to raise rates.
Two-year yields spiked briefly above 0.5%, a level last seen in March 2020. Ten-year yields were around 1.6256%, just off one-week lows hit on Tuesday.
The spread between U.S. 5-year notes and 30-year bonds narrowed further to 84.6 basis points.
Fed funds futures were pricing in a 70% chance of a June rate hike on Tuesday, even though the Fed’s taper of asset purchases, if it begins in November, could end in June as well.
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Reference: Reuters
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