Treasury Yields Hit Pre-Pandemic Levels Ahead of Fed Decision

(Bloomberg) -- U.S. Treasuries extended their six-week selloff before the Federal Reserve’s policy decision on Wednesday, with yields rising to multi-month highs.

The benchmark 10-year rate climbed as much as 5.7 basis points to 1.674%, the highest since February 2020, while the 30-year yield touched 2.428%, the loftiest level since November 2019. Meanwhile, the gap between two- and 10-year rates widened beyond 150 basis points for the first time since 2015. Yields and the curve have since retreated from those levels, remaining higher on the day.

The latest leg higher for yields comes as the Federal Open Market Committee meets to discuss whether the unprecedented level of monetary support it has provided remains appropriate as an economic recovery spurred by vaccine rollouts and fiscal stimulus gains steam. The Fed has yet to pass judgment on the run-up in rates; by contrast the European Central Bank last week pledged to step up its pace of bond purchases. Meanwhile, investors are signaling via eurodollar futures that they expect the Fed’s first hike to come by March 2023.

The selloff suggests that the market is “nervous about the message from the FOMC later today,” TD Securities strategist Gennadiy Goldberg said. “There’s a risk that the Fed may not be able to push back on hawkish sentiment if they upgrade their growth and inflation projections, and it may be particularly difficult if the 2023 dots show the median penciling in a hike.” The FOMC’s dots are chart points showing anonymous committee members’ expectations for the policy rate in the coming few years.

The FOMC is expected to update its economic projections to reflect much stronger growth than previously anticipated. While Fed Chair Jerome Powell has promised to look through bouts of price pressures until the central bank’s inflation and employment targets are met, investor expectations for both inflation and the Fed’s policy rate have been rising.

“While the consensus seems to lean toward no change in 2023 median dot, this view is at odds with the market,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA. “The market seems to be leading the Fed, not following.”

Treasuries were already under pressure when U.S. trading began Wednesday amid a selloff in U.K. gilts following an auction. The 10-year yield exceeding its March 12 year-to-date high unleashed a wave of selling in Treasury futures, then downside momentum picked up for other curve points.

The 5-year yield jumped to 0.862%, its highest since March 2020, while the 10-year breakeven -- the market’s inflation expectation for the next decade -- reached its highest level since May 2013.

Yields in the three- to five-year part of the Treasury market could rise as much as 5 basis points if any FOMC member forecasts a rate increase in 2023, Wells Fargo & Co. strategist Erik Nelson said in a note.

“The market already prices multiple hikes in 2023,” Nelson wrote. “Even so, if a couple of dots migrate to 2023 then market participants might think the door to hikes is opening.”

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