10-year Treasury yield ends at highest in almost 16 years ahead of Fed decision

By Vivien Lou Chen and Jamie Chisholm

Treasury yields ended at their highest levels since 2006-2007 on Tuesday, as investors factored in a higher-for-longer theme in rates ahead of the Federal Reserve's policy decision on Wednesday.

What happened

The yield on the 2-year Treasury BX:TMUBMUSD02Y jumped 4.7 basis points to 5.109% from 5.062% on Monday. Tuesday's level is the highest since July 25, 2006, based on 3 p.m. Eastern time figures from Dow Jones Market Data.The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 4.8 basis points to 4.366% from 4.318% on Monday afternoon. The 10-year rate ended the New York session at its highest level since Oct. 31, 2007.The yield on the 30-year Treasury BX:TMUBMUSD30Y climbed 3.3 basis points to 4.428% from 4.395% late Monday. Tuesday's level is the highest since Aug. 21.

What drove markets

Yields have crept up in recent weeks as rising oil prices and stronger-than-expected U.S. economic data raised concerns about revived inflationary pressures. Oil settled above $90 a barrel again on Tuesday and Chevron Chief Executive Mike Wirth told Bloomberg TV on Monday that prices will probably reach $100.

As of Tuesday, markets were pricing in a 99% probability that the Fed will leave its policy interest rates unchanged at a range of 5.25%-5.5% on Wednesday, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November was seen at 29%, down from 41.1% a week ago.

In U.S. economic updates on Tuesday, housing starts dropped to the lowest level since June 2020. Construction of new U.S. homes fell 11.3% in August -- short of Wall Street expectations -- as builders scaled back new projects to focus on completions. Building permits, a sign of future construction, rose 6.9% to a 1.54 million rate.

Treasury's $13 billion of 20-year bonds on Tuesday was solid, according to BMO Capital Markets strategist Ben Jeffery.

What analysts are saying

"The Fed's message will be that higher policy rates remain on the table until the economy visibly slows and inflation is closer to 2%. We doubt that there will be an unconditional commitment to raising rates but the FOMC will signal readiness to do so if needed," said Steve Englander, head of global G-10 FX research and North America macro strategy at Standard Chartered Bank's New York branch.

"We expect a cut in Q1-2024 because we expect the U.S. economy to slow, but the FOMC will likely want the slowing to be visible before opening the door to easing," he wrote in a note.

-Vivien Lou Chen -Jamie Chisholm

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09-19-23 1551ET

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