Benchmark U.S. Bond Yields Hold Steady Before Federal Reserve Decision

The benchmark U.S. bond yields showed little movement during early trading on Wednesday, as investors waited on the sidelines for the Federal Reserve's policy decision later in the day.

Key Highlights

• The yield on the 2-year Treasury fell by 1.6 basis points to 4.862%. It is worth noting that bond yields move in the opposite direction to prices.
• The yield on the 10-year Treasury retreated less than 1 basis point to 3.887%.
• The yield on the 30-year Treasury rose less than 1 basis point to 3.940%.

What's Behind the Market Trends

The Federal Reserve is scheduled to announce its policy decision at 2 p.m. Eastern, followed by a press conference led by Chair Jay Powell half an hour later.

Markets are currently pricing in a 98.9% probability of the Fed raising interest rates by 25 basis points to a range of 5.25% to 5.50%, according to the CME FedWatch tool.

Looking ahead, there's a 20.6% chance of a further 25 basis point hike to a range of 5.50% to 5.75% at either the September or November meetings, with probabilities set at 20.6% and 32.8% respectively.

Mohamed El-Erian, advisor to Allianz and Gramercy, has raised questions about why the central bank skipped a rate hike last month.

According to 30-day Fed Funds futures, the central bank is not expected to lower its Fed funds rate target back to around 5% until May 2024.

U.S. Economic Updates: An Analysis

The release of important economic data in the United States is scheduled for Wednesday. Notably, new home sales for June will be announced at 10 a.m. Eastern time.

Notable Events: European Central Bank and Bank of Japan

On Thursday and Friday, the European Central Bank and the Bank of Japan respectively will be making significant policy decisions.

Expert Opinions: Making Sense of the Developments

According to Henry Allen, a strategist at Deutsche Bank, the key question for the markets is whether there will be any indication regarding further rate hikes. As the possibility of a rate hike is mostly already factored into the market, the focus lies in the statement and press conference that accompany it.

Adding to this perspective, experts believe that Federal Reserve Chair Powell is unlikely to deliver a hawkish-leaning message. Despite the recent positive Consumer Price Index (CPI) data, he is expected to emphasize the need for additional evidence before confidently asserting that inflation will be under control. It is worth noting that the Federal Open Market Committee (FOMC) had previously indicated in their June dot plot that two more rate hikes were likely by the end of the year.

Looking ahead, analysts advise considering other crucial economic reports such as the upcoming jobs reports and CPI reports, as well as the upcoming Jackson Hole gathering. This suggests that Powell is unlikely to provide specific guidance about the outcomes of future meetings.

In summary, as anticipation builds around the release of U.S. economic updates, experts urge caution and a comprehensive analysis of all relevant factors before drawing conclusions.