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Bond Report: 10-year Treasury yield pulls back from 3% as two-day Fed meeting kicks off

Treasury yields drifted lower Tuesday morning, a day after the 10-year note brushed the 3% threshold for the first time since December 2018, with investors preparing for this week’s Federal Reserve decision.

What yields are doing

The yield on the 10-year Treasury note was at 2.929%, down from 2.995% at 3 p.m. Eastern on Monday. The benchmark briefly edged above 3% on Monday, its first move above that threshold since Dec. 3, 2018, according to Tullett Prebon data.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.719%

fell to 2.691% from 2.729% Monday afternoon. Monday’s level was its highest close, based on 3 pm. levels, since Dec. 14, 2018.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.991%

was 2.982%, down from 3.06% late Monday, which was its highest since March 6, 2019.

What’s driving the market

With the Federal Reserve kicking off a two-day policy meeting on Tuesday, policy makers are widely expected to deliver an outsize 50 basis point, or half a percentage point, interest rate increase as opposed to the typical quarter-point move. They’re also expected to announce a plan to rapidly shrink the central bank’s nearly $9 trillion balance sheet.

Read: Fed’s half-percentage point rate hike seen baked in the cake

The Fed is seen moving aggressively as it struggles to rein in inflation running at its highest in four decades.

Data released on Tuesday showed U.S. job openings climbed to a record 11.55 in March and the number of people quitting also hit an all-time high, in another sign of a historically tight labor market. Meanwhile, factory orders were up 2.2% last month.

The yield on the 10-year German bond
TMBMKDE-10Y,
0.938%
,
known as the bund, arguably the most important financial instrument in Europe, reached the 1% level on Tuesday for the first time in nearly seven years. It had traded in negative territory as recently as March.

The Reserve Bank of Australia raised its official cash rate for the first time since November 2010 on Tuesday as it seeks to tame inflation running at its highest in 20 years. The RBA raised its official cash rate to 0.35% from a record low 0.10%, a larger-than-expected move, with the RBA signaling more increases likely in coming months.

What analysts say

“Just as consequential for the overall market as the outright level of rates is the speed with which the move toward higher yields has occurred. A slow, grinding move toward a positive real yield environment that does not unduly tighten financial conditions or drive a faster selloff in domestic equities is the variety of response that would give the Fed cover to proceed aggressively,” wrote strategists Benjamin Jeffery and Ian Lyngen, in a note.

“The S&P 500
SPX,
+0.12%

down 14% [year to date] and the NASDAQ
COMP,
-0.20%

21% in the red over the course of 2022 reinforces the tech sector’s sensitivity to higher discount rates,” they wrote.

See: Powell wants to get rates closer to neutral. But what’s that? Think between 5% and 6%, former top Fed staffer says

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