US Treasury yields inch higher as investors await Fed decision
US Treasury yields rose modestly on Tuesday ahead of the Federal Reserve's policy meeting, with the 2-year at 4.735% and the 10-year just under 5%, while the spread between them narrowed.
US Treasury yields moved slightly higher on Tuesday, staying within narrow ranges as markets priced in the outlook for Federal Reserve policy ahead of Wednesday's decision. The 2-year Treasury yield was up 2.4 basis points at 4.735%, while the benchmark 10-year note rose 0.2 basis points to 4.988%, remaining below the 5% threshold. The 30-year bond held steady at 5.301%.
The yield curve spread between the 2-year and 10-year notes, a commonly watched indicator of economic expectations, stood at a positive 25.1 basis points, its narrowest level in about a month. The breakeven rate on five-year Treasury Inflation-Protected Securities (TIPS) was 2.461%, and the 10-year TIPS breakeven rate was 2.351%, suggesting investors expect inflation to average roughly 2.4% per year over the next decade.
"It seemed like the narrative started to flip a little bit more towards potential growth scare concerns," said Thomas Simons, chief US economist at Jefferies. "But the economy is still in fairly good shape. The risks to higher inflation are more pronounced than what you might think given where the market is expecting the Fed to go."
"I wouldn't be surprised to see the little rally that we've had in the long end kind of backs itself back up again," Simons added.
Market participants noted that recent bond price gains were driven by a sell-off in equities amid concerns over the sustainability of AI-related spending. An auction of $70 billion of 5-year notes saw yields slightly above the bid-deadline level, indicating investors required a modest concession to absorb new supply.
"The market's just fighting with supply and with the Fed and the ECB both meeting this week. It's probably going to be a hawkish tone out of both central banks," said Tom di Galoma, managing director at Mischler Financial Group.
Rate futures on Tuesday reflected a roughly 93% probability that the Fed will keep rates unchanged at its upcoming meeting, while still pricing in about a 75% chance of a quarter-point hike in December. The European Central Bank was expected to hold rates steady on Thursday.
Overall, investors remain cautious, balancing the potential for higher borrowing costs against the ongoing AI-driven investment boom and mixed economic data.