Treasury yields fell slightly Friday, leaving the week’s climb intact, as traders looked ahead to next week’s meeting by the Federal Reserve, where a rate increase is expected.
The 10-year Treasury note yield TMUBMUSD10Y, -0.08% fell 1 basis point to 3.068%, trimming the weeklong climb to 7.6 basis points. The 2-year note yield TMUBMUSD02Y, -0.27% was mostly flat at 2.803%, around its highest levels since June 2008, leaving its weekly yield gain at 2.2 basis points. The 30-year bond yield TMUBMUSD30Y, +0.13% was down 0.7 basis point to 3.206%, but up 7.6 basis points for the week, according to Tradeweb data.
Bond prices move in the opposite direction of yields.
In a session with no first-tier economic data, investors looked to next week’s Fed meeting in Sept. 25-26, where a rate increase is expected. More important, investors will hone in on Fed Chairman Jerome Powell’s news conference where he may debate the risks to the economy, and the future rate increase trajectory. Based on prices for eurodollar futures, traders have already priced in two additional hikes this year, and two more next year. The fed-funds rate is currently at a range of 1.75% to 2.00%.
“The Fed is widely expected to hike another 25 basis points to a range of 2.00-2.25% at the September confab. Powell’s news conference will, as always, be closely watched but we expect his comments to reflect growing upside risks to the economic backdrop. He is likely to throw shade on the notion that tariffs are a significant downside risk,” wrote Tom Porcelli, chief U.S. economist for RBC Capital Markets.
Market participants will also be on the lookout for remarks on whether the Fed will pause or shoot past the neutral rate, where monetary policy is neither restrictive or accommodative. Fed. Gov. Lael Brainard and other senior Fed officials have said the central bank could push interest rates above that threshold if the economy maintains its momentum.
But tightening policy beyond the neutral level is a “recipe for the yield curve to invert,” said Tom Graff, head of fixed income at Brown Advisory, referring to the spread between short-term and long-term bond yields. Since World War II, a recession has followed every time this spread turned negative, inverting the yield curve.
See: With its last easy decision, Fed will try to avoid adding fuel to the fire
Japanese debt sold off after the Bank of Japan which held its regular policy-setting gathering on Tuesday, reduced its bond-buying to ¥50 billion ($0.44 billion) to ¥60 billion yen, surprising markets. The central bank has the discretion to calibrate its bond purchases as part of its yield-curve control policy. BOJ Gov. Haruhiko Kuroda said in July that the central bank would allow the yield on the 10-year bond to fluctuate by as much as 20 basis points on either side of 0%, double the previous range of 0 to 10 basis points.
The 10-year Japanese government bond yield TMBMKJP-10Y, +10.14% rose 1.1 basis points to 0.129%, while the 40-year bond yield TMBMKJP-40Y, +5.11% climbed 5.2 basis points to 1.048%, its highest since November.
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