US Treasury yields fell on Thursday morning after the Federal Reserve kept interest rates unchanged at its October meeting on Wednesday. Investors are now watching the Fed’s comments on inflation and whether it will raise interest rates again in December.
At 6 am ET on Thursday, the yield on the 10-year US Treasury note fell by 5 basis points to 4.995%. The 2-year Treasury yield also fell by 5 basis points to 4.683%. The 30-year Treasury yield dropped by 3 basis points to 5.329%, according to CNBC.
What is a basis point?
One basis point is equal to 0.01 percentage points. Treasury yields and bond prices usually move in opposite directions. This means bond prices rise when yields fall. When yields rise, bond prices usually fall.
Fed holds US interest rates steady
The Federal Reserve voted on Wednesday to keep its key overnight interest rate in the range of 3.75% to 4%. However, the central bank said inflation remained high, showing that policymakers still have concerns about rising prices, according to its post-meeting statement.
The annual US inflation rate reached 3.7% in September. This was higher than the Federal Reserve’s long-term inflation target of 2%, according to data reported by CNBC. The Fed is monitoring inflation data to decide whether its current interest rate policy is enough to bring price increases under control.
Fed says more data needed to control inflation
The Federal Reserve said it needed more information before deciding what action to take on interest rates. “The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal,” the central bank said in its statement on Wednesday.
Speaking to reporters after the meeting, Federal Reserve Chair Kevin Warsh said policymakers had not decided on a fixed path for interest rates. He said the Fed would have clearly announced its plans if it had reached a firm decision on monetary policy, according to CNBC.
Markets expect Fed rate hike in December
Investors are still expecting the Federal Reserve to raise interest rates at its December meeting. Markets are pricing in an 83.6% chance of a quarter-percentage-point, or 0.25 percentage-point, rate hike in December, according to the CME Group’s FedWatch tool.
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Investors see softer path for future rate hikes
Ali Hassan, a portfolio manager at Thornburg Investment Management, said markets appeared to view the Fed’s latest comments as pointing towards a softer interest rate outlook rather than signalling a fresh inflation scare. He said investors had reduced their expectations for rate hikes further into the future, according to a note published on Wednesday, according to CNBC.
Hassan said markets still expected a rate hike in December but were less certain about whether the Fed would raise rates again after that. This suggests investors are trying to balance the possibility of another rate increase against the chance that the central bank may take a less aggressive approach later.
Treasury yields await fresh Fed signals
Hassan said Friday would be important because the period during which Fed officials are restricted from speaking around the policy meeting would end. If policymakers signal that more rate hikes could be needed, Treasury yields at the shorter end of the maturity range could rise again, reversing some of their recent decline, he said, according to CNBC.
Treasury yields are likely to remain sensitive to incoming economic data and comments from Federal Reserve officials as investors assess the next interest rate decision. The main question for markets is whether the Fed will raise rates in December and whether further increases will follow, given that inflation remains above its 2% target.