NEW YORK- Treasury yields edged lower as the market grappled with a Federal Reserve message that interest rates would stay higher for longer as the US economy continued to offer mixed signals on the likelihood of recession.
Futures show the Fed’s target rate will stay above 5 percent through January, while the probability of a rate hike by Fed policymakers at their next two-day meeting ending on July 26 are at 73.9 percent.
But despite the hawkish rhetoric from Fed officials who indicate two more hikes are in store, the market doesn’t believe it, said David Petrosinelli, senior bond trader with InspereX in New York.
“The market is skeptical given that pause,” he said, referring to the meeting on June 13-14, when for the first time since the Fed began its anti-inflation campaign in March 2022, policymakers desisted from raising rates.
“Why would you pause if you need more? There’s a healthy and warranted amount of skepticism in that,” Petrosinelli said.
The Treasury sold $42 billion of two-year notes at a high yield of 4.67 percent. The auction was strongly bid, Petrosinelli said.
The two-year Treasury yield, which typically moves in step with interest rate expectations, fell 1.9 basis points at 4.731 percent, while the yield on benchmark 10-year notes slid 2.2 basis points to 3.717 percent.
“The market is trying to figure out how long is the Fed going have to stay this high and what are the implications of over-tightening or staying higher for longer even if we don’t get some sort of major economic recession or downturn?” said John Luke Tyner, portfolio manager at Aptus Capital Advisors in Fairhope, Alabama.
