Treasury yields were little changed on Monday as investors geared up for this week’s meeting of Federal Reserve policy makers.
What are yields doing?
The yield on the 10-year Treasury note
fell 1 basis point to 1.276% versus 1.286% late Friday afternoon. Yields fall as debt prices rise.
The 2-year note yield
declined less than 1 basis point to 0.194% versus 0.200% on Friday.
The 30-year Treasury bond yield
was unchanged at 1.925%.
What’s driving the market?
Monday’s stability in Treasury yields comes in contrast to volatile trading last week, when the 10-year rate dipped to a five-month low before bouncing back briefly above 1.30%. Earlier on Monday, Treasury yields had been under renewed pressure as stocks sold off in China, undercut in part by U.S.-China tensions.
Data released during the New York session pointed to new home sales falling 6.6% in June to an annual rate of 676,000, the lowest since the first month of the COVID-19 pandemic in early 2020, as high prices and a limited selection appeared to frustrate would-be buyers.
Meanwhile, the Treasury’s $60 billion auction of 2-year notes “went well, but only after a near-perfect pre-auction setup,” said Jefferies economists Thomas Simons and Aneta Markowska, in a note.
The main event this week is likely to be the two-day meeting of the Fed’s policy-setting Federal Open Market Committee, which will conclude on Wednesday. The committee is largely expected to keep the target range for the fed funds unchanged near zero, and to maintain the FOMC’s $120 billion in monthly asset purchases,
Policy makers are also expected to discuss plans around eventually slowing the pace of the Fed’s monthly bond purchases. But investors expecting clear answers about the crucial questions of when the tapering will start and the pace of any pull back will likely be disappointed, economists said.
What are analysts saying?
Treasury yields are likely to continue moving either higher and lower in a “rolling” fashion, as opposed to sharply up or down, for months to come, says John Flahive, head of fixed-income investments at BNY Mellon Wealth Management.
“There are a lot of uncertainties and unknowns with the delta variant and other parts of the globe — including questions on whether they’ll continue to have the reopening that we’ve had domestically,” he said via phone Monday. The 10-year yield could drop briefly below 1% in the next couple of months, but “I’d be surprised if it stayed there,” he said. And while a 2% level is “still achievable, it might not be in 2021” given the foreign demand for Treasurys.
With regard to Wednesday’s FOMC decision, “we think the Fed continues with the script of saying that current policy is still appropriate and a long ways off from the mandate of getting millions of people back to work,” says Flahive, who helps oversee $30 billion in fixed income.
Though it’s a “long shot,” the Fed might flick this week at the possibility of tapering its mortgage-backed securities in the fourth quarter, or sooner than the market is expecting, he said.
Senior trader David Petrosinelli at InspereX, an underwriter and distributor of securities, said some of the surprises that could come out of this week’s meeting would include “more detail and specifics on tapering, such as dollar amounts.”
“Specific guidance on that would be something the market is not expecting,” he said via phone. So, too, would be any updated guidance on the potential for possibly changing the fed-funds rate down the road, Petrosinelli said.
“In general, the Fed is going to give us less specifics or time targets at this meeting, but talk more about tapering and call for it at the end of year or early next year.”