CHICAGO- The $22 trillion market for US Treasury securities may get a reality check from the Federal Reserve this week following a plunge in interest rates that bucked expectations of higher yields this year as the economy rebounds from the COVID-19 pandemic.
Yields, which move inversely to prices, have been in a downward trend since the last Federal Open Market Committee meeting in June. The market initially perceived the Fed as being a bit hawkish as policymakers last month projected an accelerated timetable for rate hikes and opened discussions on ending crisis-era bond purchases amid a backdrop of rising inflation.
But the benchmark 10-year note yield, which rose as high as 1.776 percent in late March, fell to its lowest level since February on Tuesday at 1.1280 percent. It, along with the 30-year bond yield, were trading about 30 basis points lower on Friday than where they were just after the meeting.
The yield curve has also flattened since then, with the gap between two- and 10-year notes shrinking to its smallest level since February.
The FOMC meets on Tuesday and Wednesday. George Goncalves, head of US macro strategy at MUFG, said the central bank needs to push back a bit against the market and stick with an optimistic outlook that shows the economy has a “decent runway” and that the central bank still intends to taper its $120 billion in monthly debt purchases.
