Rates rise as Fed set to begin two-day meeting; 10-year Treasury yield hits highest since May

  • The Federal Reserve will begin its two-day monetary policy gathering Tuesday, with analysts expecting the central bank to announce a quarter-point rate hike.
  • Members of the FOMC are grappling over how much more monetary tightening is necessary to keep the economy (and inflation) healthy.

U.S. government debt yields continued their upward climb on Tuesday ahead of the Federal Reserve’s policy meeting.

The yield on the benchmark 10-year Treasury note was higher at around 3.11 percent at 7:07 a.m. ET, it’s highest level since May 18, when the rate hit a 2018 high of 3.128 percent.

The yield on the 30-year Treasury bond was up at 3.246 percent. Bond yields move inversely to prices.

The Federal Open Market Committee will begin its two-day monetary policy gathering Tuesday, with analysts expecting the U.S. Federal Reserve to announce a quarter-point rate hike when it concludes its meeting tomorrow.

The hike will push the funds target to 2 percent to 2.25 percent, where it last was more than 10 years ago.

The event will also be watched closely to see if the central bank provides any signals as to where monetary policy will be heading over the coming months and into next year.

“I think you’re going to be looking at two things with respect to the Fed meeting. The first is whether they have the word ‘accommodative’ in the statement,” Arthur Bass, managing director of fixed income at Wedbush Securities, told CNBC on Monday.

“The dot plot is going to be the other thing to look at,” he continued. “I think it’s more likely they increase. We’ve been locked in a trading range since May, but I bet people come out of the Fed meeting feeling more bearish.”

The dot plot displays expectations from individual FOMC members about the direction of interest rates, which in turn will help determine the direction of markets.

Members of the FOMC are grappling over how much more monetary tightening is necessary to keep the economy (and inflation) healthy. Up until now, most officials have been comfortable with the Fed’s slow-and-steady rate hikes and unwind of its massive balance sheet.

A flattening of the so-called yield curve has some economists nervous as spreads between short-term and long-term debt rates shrink to lows not seen since before the 2008 financial crisis.

An inverted U.S. yield curve — where short-term rates surpass long-term rates — has frequently heralded upcoming recession.

The Bank of Japan released the minutes of its July policy meeting Tuesday. In the release, some policymakers said that the institution should consider the potential risks of ultra-easy policy at a more serious level, Reuters reported.

On Monday, European Central Bank President Mario Draghi warned of stronger inflation, saying in a speech that underlying inflation was expected to “increase further over the coming months as the tightening labor market is pushing up wage growth.” The news saw the two-year treasury yield hit a high not seen since 2008.

The U.S. Treasury is set to auction $38 billion in five-year notes.

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