© Stocksak. FILE PHOTO. The Federal Reserve Building is set against a blue background in Washington, U.S.A, May 1, 2020. REUTERS/Kevin Lamarque
By Davide Barbuscia
NEW YORK (Stocksak), Monday: U.S. Treasury yields rose on Monday as investors remained worried that the Federal Reserve would continue its ultra-hawkish stance against inflation despite economic data indicating a slowdown of U.S. business activity for October.
The Fed is expected to raise rates by 75 basis points next Wednesday, but investors will be closely watching any indications from policymakers regarding a less aggressive approach to future rate increases.
“Their language regarding this issue will be very significant with any softening of their tone likely boosting stocks, bonds, and hurting the dollar, or more hawkish languages having the opposite effect,” David Kelly, chief global strategist, JPMorgan (NYSE) Asset Management, stated in a Monday note.
The debate has been shifting at the central bank to how high it can safely push borrowing prices. Mary Daly, San Francisco Fed President, said Friday that it was time for people to talk about “stepping down” from rate increases.
Money markets were filled with speculation about a Fed that might be more dovish, despite the fact that U.S. inflation remains high.
Monday’s Fed funds futures traders priced in a nearly 100% probability of a 75-bps hike next week, and a 50% probability that another 75 bps increase will occur in December. CME Group (NASDAQ.) data shows that the chance for a 75 bps December increase was more than 65% a week prior.
Treasuries, where yields move in an inverse fashion to prices, fell on Monday, reversing gains from earlier. Investors were skeptical about a significant shift in Fed’s stance.
“There’s been some optimism coming from equities lately, so there is a maybe more of a risk on sentiment,” said Jake Jolly (NYSE:) Investment Management Senior Investment Strategist. He said, “But looking back, it’s difficult to see any material changes and the macro outlook would indicate that things haven’t changed much.”
Yields dropped after an S&P Global (NYSE:) survey on Monday which showed U.S. business activity contracted for a fourth straight month in October, with manufacturers and services firms reporting weaker client demand – the latest evidence of an economy softening in the face of high inflation and rising interest rates.
They rose again, with benchmark 10-year Treasury yields at 4.229% and 2-year note yields at 4.498%. The 30-year Treasury yields climbed to an 11 year high of 4.359%.
These data points should be a central focus point for Fed officials if they intend to become data dependent. Matthew Miskin (co-chief investment strategist at John Hancock Investment Management) said that it is yet to be determined if that happens.
He stated that the Fed “is likely to cause a policy reversal in time but for now, I believe it is trying to not succumb to weaker economic data.”
Wild price swings have been caused by uncertainty around Fed’s policies. Many participants are complaining about the deteriorating liquidity of the $24 trillion U.S. government bond market.
Monday’s acknowledgement by Janet Yellen, Treasury Secretary of the Treasury, that liquidity has decreased due to volatility was not a cause for financial instability.
October 24 Monday 3 :00PM New York/ 1900 GMT
Price Net Current
Yield % change
Three-month bills 3.9275, 4.0198 0.028
Six-month bills 4.3525 4.5095 0.69
Two-year note 99-139/256 4.4982
Three-year note 99/68/256 4.5163 +0.017
Five-year note 98-254/256 4.3537 000
Seven-year note, 97-122/256 4.2995 0.010
10-year note 88-5/256 4.2297 0.018
20-year bond 84–64/256 4.5942 0.024
30-year bond 77-112/256 4.3593 0.055
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 36.50 -1.25
U.S. 3-year dollar swap 10.75 0.50
U.S. 5-year dollar swap 3.00 0.00
U.S. 10-year dollar swap 0.25 -0.25
U.S. 30-year dollar swap -49.75 -2.25