Treasury yields were slightly lower in the early hours of Thursday, as markets digested the Federal Reserve’s 50 basis point rate hike and signals that it will continue lifting rates to rein in inflation.
The yield on the benchmark 10-year Treasury note was down by around 2 basis points at 3.4790%, while the yield on the 30-year Treasury bond slipped by a similar amount to 3.5170%. The 2-year yield was also lower at 4.2216%. Yields move inversely to prices.
The Fed’s hike on Wednesday marked a slowdown from the previous four increases of 75 basis points. The central bank indicated that rates will remain higher throughout 2023, with cuts unlikely until 2024. It also projected that the “terminal rate” will rise to 5.1% before the end of the hiking cycle.
Seema Shah, chief global strategist at Principal Global Investors, said Tuesday’s promising inflation reading did not seem to have swayed the Fed over its monetary tightening trajectory. She also suggested that Wednesday’s announcement should mark the “death knell” for a recent rally in risk assets.
“Not only do they see rates above 5% next year, but, unless they are planning to take rates towards 6%, the dot plot indicates no rate cuts in 2023. There also seems to be a broad acceptance of inflation above the 2% target at the end of next year — imagine how high they would need to take rates if they wanted to score a bullseye!” Shah said.
“The Fed still remains coy about the possibility of recession, but with most Fed officials considering risks to be tilted to the downside, it’s fair to say they are far more worried about the economic outlook than they are willing to admit.”
On the data front, investors will be looking to the November retail sales figures, due out at 9:30 a.m. ET, alongside last week’s jobless claims. Industrial production figures for November will surface at 10:15 a.m. ET.
Auctions will be held on Thursday for $45 billion each of 4-week and 8-week Treasury bills.