Treasury yields in the United States rose on Tuesday, as a stable economy and generally favorable data decreased the likelihood of a recession and elevated the prospect of two more interest rate hikes this year.
On Wednesday, the Federal Reserve is widely expected to raise interest rates by 25 basis points (bps) to a target range of 5.25% to 5.50%. The Fed is expected to remain on hold until May 2024, according to the rate futures market in the United States.
According to the CME’s FedWatch, the chances of another rate hike in November have risen to around 33% from around 26% a week earlier.
“There is more concern that the Fed will be more hawkish than expected,” said Ellis Phifer, managing director, fixed income capital markets, at Raymond James in Memphis, Tennessee.
“I believe there should be more than one rate hike because the data needs to come in.” However, the Fed is prepared to take a step back. I don’t see them changing course unless things change dramatically. It should be one hike and then they will be put on hold.”
The figures released on Tuesday provided more evidence that the economy is not going off the tracks despite the most vigorous tightening cycle since the 1980s.
Consumer confidence in the United States reached a two-year high in July, bolstered by ongoing optimism about the labor situation. According to the Conference Board, its consumer confidence index increased to 117 this month, the highest score since July 2021, up from 110.1 in June. Reuters polled economists, who predicted the index would rise to 111.8.
At the same time, the S&P Corelogic Case-Shiller index of U.S. home prices remained stable, with a non-adjusted rise of a still-solid 1.5% in May.
The US Federal Housing Finance Agency price index rose 1.7% in May, remaining unchanged from April. The index increased 2.8% in the year to May.
“We are still expecting a recession.” But, according to Stan Shipley, managing director and macro research analyst at Evercore ISI in New York, “market expectations of a recession have dropped from 65%-70% to below 50% now.”
The yield on 10-year Treasury notes US10YT=RR was 3.90% in midday trading, up 4.3 basis points.
US30YT=RR 30-year bond yields increased 2.5 basis points to 3.945%.
The two-year US2YT=RR Treasury yield, which often reflects interest rate forecasts, was up 4.4 basis points at 4.882%.
The yield spread between US two-year and 10-year Treasury notes US2US10=RR, which is viewed as a recession predictor when longer-duration rates are lower than shorter-duration yields, narrowed somewhat on Tuesday to -98.30 basis points (bps) from -104.70 bps late on Monday.
The reduced gap indicated that the Fed is nearing the conclusion of its tightening cycle, with the yield on the shorter end of the curve being slightly compressed.
Analysts said the $43 billion US Treasury five-year note auction on Tuesday was also strong. The high yield, on the other hand, was slightly higher than predicted, implying that investors wanted a small premium to take the note.
The U.S. Federal Reserve is expected to raise interest rates by 25 basis points on Wednesday, with the possibility of two more rate hikes this year.
The chances of another rate increase in November have increased to about 33%.
The yield on 10-year Treasury notes increased by 4.3 bps to 3.90%, while 30-year bond yields inched up by 2.5 bps to 3.945%
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