Bond Report: Treasury yields climb ahead of this week’s Fed meeting

Treasury yields rose Monday, as investors awaited a Federal Reserve decision this week that’s expected to deliver a quarter of a percentage point rate hike and clues to future moves.

What yields are doing

The yield on the 2-year Treasury note

rose 5.4 basis points to 4.259%, its highest yield based on 3 p.m. Eastern levels since Jan. 6. Yields and debt prices move opposite each other.

The 10-year Treasury note yield

increased 3.3 basis points to 3.55%, its highest finish to a U.S. trading session since Jan. 11.

The yield on the 30-year Treasury bond

increased 2.6 basis points to 3.658%.

Market drivers

The Fed will conclude a two-day policy meeting on Wednesday that’s expected to deliver a rate increase of 25 basis points, or a quarter of a percentage point— a downshift from the outsize 75 and 50 basis point increases seen in 2022 that contributed to a sharp selloff in both bonds and stocks.

The Fed has signaled that it intends to raise the fed-funds rate above 5% and keep it there for some time as it looks to quash inflation. Money-market traders, however, have priced in the potential for rate cuts before year-end.

See: The Fed and the stock market are on a collision course this week. What’s at stake.

Data on Friday showed that the cost of U.S. goods and services rose 5% year over year in December, slowing from 5.5% a month before, signaling further progress in the Fed’s inflation fight.

The Fed’s preferred measure of inflation — the PCE price index — peaked at 7% last summer, helped along by a retreat in energy prices, but remains high above the central bank’s target of 2%.

The Treasury Department late Monday it expects to borrow $932 billion in the first quarter, which is $353 billion higher than previously reported and driven by a lower cash balance at the end of the last quarter and projections of lower receipts and higher spending.

The updated forecast includes an end-of-quarter cash balance of $500 billion.

The department is once again using extraordinary measures to stay under the debt ceiling that Congress has been unable to increase. These measures allow the government to continue to issue bills and notes as scheduled in the near $24 trillion Treasury market to replace old debt.

What analysts say

The Fed is likely to “reiterate that it anticipates ‘ongoing increases’ in interest rates will be appropriate. And Chair Powell will probably use his press conference to push back against market expectations for 50bp of rate cuts in the second half of this year,” wrote economists at UniCredit Bank, in a note.

“To reinforce the message, the Fed might decide to include a line in the postmeeting statement indicating that once rates rise to ‘sufficiently restrictive’ levels, they will likely remain there for ‘some time,’” they wrote.

—Greg Robb contributed reporting to this article.

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