US Treasury yields fell on Wednesday as the market anticipates the Federal Reserve’s decision on subsequent interest rate hikes. The 2-year Treasury yield fell to 4.656%, losing 4 basis points, while the10-year Treasury yield fell to 3.808% after losing 3 basis points.
Traders generally expect the Fed to resume rate hikes by July, with a 63% chance that the next hike will be 25 basis points. Based on data from the CME Group’s FedWatch tool, traders are 95% sure that the Fed will maintain the 5% to 5.25% benchmark rate. This follows the 4.0% annual growth recorded in the May consumer price index (CPI), a level not seen since 2021. In May, the CPI climbed 0.1% month over month, with core inflation (without energy and food) coming in 0.4% higher.
Treasury Yields Fell Last Month on Debt Ceiling Debate
The Treasury yields also reacted negatively to the debt ceiling negotiations as the initial June 1 deadline approached. The yield on the 2-year Treasury fell to 4.57% after losing 6 basis points, while the 10-year Treasury yield fell to 3.829% upon shedding 3 basis points.
Prices and yields are inversely related such that 6 basis points equal 0.06%. Generally, traders and investors use the fluctuations in Treasury yields to predict the market and inform trading decisions. When Treasury yields drop, investors are usually looking for safer assets to hedge their funds against events that may affect monetary value. Potent events include changes in monetary policy, political events, and interest rate hikes.
Earlier this month, the Senate approved a bill to suspend the US debt ceiling for nearly 2 years. Following a 63-36 vote in favor of the bipartisan deal, the US has suspended the $31.4 trillion debt ceiling until January 2025. This happened just as it nearly missed the deadline, avoiding a first-ever debt default on June 5.
Economists are now predicting that the US Treasury will issue debt worth $1 trillion. The Treasury Department had hit the debt ceiling in January and met financial obligations via other means. In a January letter, Treasury Secretary Janet Yellen told House Speaker Kevin McCarthy that the department would take “extraordinary measures”. The Treasury then began selling investments and postponing reinvestments in specific funds to free up the much-needed funds.
Now, the Treasury must return all funds and pay accruable interests. Selling debts to balance out its books could have some economic effect as Treasury yields could fall further. There is also the risk of a recession, as economists believe that the Treasury’s need for cash would create competition with banks and hamper lenders’ funding rates,
Bank of America Corp believes that the effect of these events could equal a 25-basis-point increase.