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Bond Report: Treasury yields edge up ahead of expected Fed rate hike

Treasury yields were mixed early Wednesday as investors awaited a Federal Reserve decision that’s expected to deliver the largest rate increase since 2020.

What yields are doing

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.957%

was at 2.957%, unchanged from its level at 3 p.m. Eastern. Yield and debt prices move opposite each other.

The 2-year Treasury-note yield
TMUBMUSD02Y,
2.776%

was at 2.777%, up from 2.768% on Tuesday afternoon, which was its highest since Dec. 12, 2018.

The 30-year Treasury bond
TMUBMUSD30Y,
2.995%

yielded 2.995% versus 3.006% late Tuesday.

What’s driving the market

It’s all about the Fed. The central bank is expected to raise the fed-funds rate by 50 basis points, or a half percentage point, while outlining its plan to begin shrinking its nearly $9 trillion balance sheet.

The Fed typically moves rates in quarter-point increments, with its last half-point hike coming in 2020. The outsize move, and investor expectations for more of them in the future, comes as the Fed attempts to rein in inflation running at its hottest since the early 1980s.

See: Fed on track for biggest rate hike since 2000

The Fed will announce its decision at 2 p.m., with Chairman Jerome Powell set to host a news conference at 2:30 p.m. Investors will be looking for clues to the size and scope of future rate increases, including the possibility of a 75 basis point rise, as well as details on plans to shrink the balance sheet.

Read: Will Fed rate hike be a ‘clearing event’ for battered U.S. stock market? What investors are watching for on Wednesday

It’s a busy day on the economic calendar. Automatic Data Processing Inc. will release its April estimate of private-sector payrolls growth at 8:15 a.m. Economists surveyed by The Wall Street Journal, on average, look for the private sector to have added 390,000 jobs, down from 455,000 in March.

Data on the March international trade balance is set for release at 8:30 a.m.

The final reading of the S&P Global April U.S. services purchasing managers index at 9:45 a.m., followed by the Institute for Supply Management’s April services index at 10 a.m.

What analysts say

“It won’t be easy for Powell and his colleagues to surpass market expectations. The bar has been set quite high with more than 200 basis points of rate hikes priced in by September,” said Marios Hadjikyriacos, senior investment analyst at XM, in a note.

“Going any faster than this could snap something — whether it’s the bond market, housing market, or a stock market swimming in leverage. The Fed wants to avoid panic,” the analyst wrote.

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