US Treasury Yields End Three-Day Slide as Fed Decision Draws Closer

US Treasury yields edged up on Wednesday, reversing three consecutive sessions of decline ahead of the Federal Reserve’s interest rate decision. Investors were also looking towards the press conference by Fed Chair Kevin Warsh for any indication of the central bank’s next move.

The benchmark 10-year Treasury yield gained 1.2 basis points to end up at 4.616%. As for the shorter-term 2-year yield, it is more sensitive to rate expectation changes, hence, rose by 2.4 basis points to finish at 4.301%. Both rates are now poised to end a three-day losing streak. The 30-year bond yield with higher tenure, on the other hand, stayed nearly unchanged at 5.1%.

Rates have eased from their levels seen in July yet still managed to make gains this month. With oil prices going up, expectations of further rate hikes have resurfaced among investors.

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The 10-year and 30-year yields were heading towards their sharpest monthly rise since March. The 2-year yield was also on course to record its fifth straight monthly increase.

The broad expectation in the market was that the Federal Reserve would keep interest rates unchanged. Still, traders had not completely ruled out a hike. Money-market pricing showed a nearly 32% possibility of a 25-basis-point increase, according to the CME FedWatch Tool.

BCA Research analysts said the labour market was not adding to inflation and that leading indicators continued to point towards cooling price pressures. Inflation expectations also remained broadly anchored. If economic data continued to soften, the most hawkish phase of the policy outlook could be over, they said in a note reported by Reuters.

Comparable indications could be seen on the inflation-swap front. Both one-year and five-year inflation swaps have declined consistently over the last several weeks, signifying that investors did not anticipate a significant increase in inflation.

Recent economic readings have also pointed to some moderation. US job growth slowed sharply in June, while payroll numbers for the two preceding months were revised down. Consumer inflation eased by more than expected during the month as crude oil prices declined.

Even so, traders had fully priced in the possibility of a rate increase in September. Data compiled by LSEG also indicated a 71.2% chance of another hike by the end of the year.

Wednesday’s decision would be the Fed’s second policy meeting under Warsh’s chairmanship. Analysts expected the central bank to avoid detailed guidance on the path of interest rates. At the previous meeting, Warsh had delivered a shorter policy statement compared with those issued under former chair Jerome Powell.

Deutsche Bank’s global head of macro research, Jim Reid, said in a note reported by Reuters that markets had not faced this degree of uncertainty over whether the Fed would alter rates before a meeting since December 2018.