(Bloomberg) — The U.S. bond market’s rally was halted by a Federal Reserve official’s mere mention of the possibility of an interest rate increase.
Most read on Bloomberg
In response to a question at a conference in Washington, New York Fed President John Williams said Thursday that another rate hike was not his base case scenario. But he also said that “if the data tells us that we would need higher interest rates to achieve our goals, then obviously we would want to do that.”
Treasury yields, which were already rising after the latest US economic data, then rose further. The move was driven by the two-year yield, which rose 5 basis points to nearly 4.99%, near the top of its recent range.
“We’ve been this round trip in terms of Treasury yields, and we’re back where we started a few months ago,” Aoifinn Devitt, Moneta’s chief global markets strategist, told Bloomberg Television. “It just calls everything into question.”
Read more: New York Fed’s Williams sees no urgency to cut interest rates
Money managers and Wall Street strategists have been forced to rethink their assumptions over the past two weeks in response to strong economic data and remarks from Fed officials.
The yield on two-year Treasury notes, sensitive to monetary policy, peaked this week at just over 5%, the highest level since November, after Fed Chairman Jerome Powell appeared to endorse the recent reduction in bond market expectations for interest rate cuts this year.
On Thursday, swap rates that predict Fed decisions rose slightly, incorporating a cumulative 38 basis points of rate cuts between now and the December policy meeting, up from 43 basis points at Wednesday’s close. A first reduction of a quarter point remains planned for the November political meeting.
Market-implied odds of another Fed rate hike – after the 11th from March 2022 to July 2023 – remain near zero.
Yet in the interest rate options market, hedging against the possibility of rates rising – or, at least, not falling – is all the rage.
Economic indicators in recent weeks, showing a strong jobs market, persistent inflation and stronger-than-expected retail sales, have sown concerns about whether the Fed will succeed this year in implementing the cuts. rate of three-quarters of a point that it forecast in March.
The Treasury index has given investors losses of nearly 2% so far this month, erasing the 1.3% advance recorded in March, according to data compiled by Bloomberg.
But for some on Wall Street, including Kelsey Berro of JPMorgan Asset Management, the higher yields are a reason to buy. In fact, investors had gathered Wednesday for an auction of 20-year bonds.
“We think there are limits to how much yields can rise because the Fed is still in a state where they think they’ve done enough,” she said on Bloomberg Television.
–With the help of Edward Bolingbroke.
(Updates prices and adds context, comments throughout.)
Most read from Bloomberg Businessweek
©2024 Bloomberg LP