Treasury yields rose Wednesday, leading the 10-year yield above the 2% threshold for the first time since March 17.
A disappointing reading on first-quarter gross domestic product sparked a bout of bond buying that sent Treasury yields falling for a brief stint. But yields soon resumed their upward trend as bond investors braced for an updated statement from Federal Reserve policy makers, expected Wednesday afternoon.
The weak GDP report was hardly a surprise, as recent data have missed expectations on all fronts, including the labor market, wage growth, consumer spending and manufacturing, said Jeff Carbone, managing director at wealth management firm Cornerstone Financial Partners.
While stocks extended losses, the eurozone’s government bond market also sold off, sending the German bund’s yield back up to levels last seen over a month ago. The drop came after former Pimco Chief Bill Gross, among other investors, described bunds as a “short of a lifetime.”
The yield on the 10-year Treasury note TMUBMUSD10Y, +2.91% rose 9.2 basis points to 1.065%, according to data from Tradeweb. The yield on the two-year note TMUBMUSD02Y, +4.21% increased two basis points to 0.579% and the 30-year bond TMUBMUSD30Y, +2.40% yield rose 10.2 basis point to 2.775%.
Treasury prices move in the opposite direction of yields.
The Fed’s statement will likely clarify whether the central bank is “reasonably confident” in the inflation outlook, as it indicated in March’s policy statement.
Investors are on the lookout for slight revisions in the Fed’s wording that could hint at the central bank’s expectations for the economy, Carbone said.
Many analysts have blamed the soft first-quarter data on transitory factors, such as the severe winter weather and a labor dispute at west coast ports, as well as on the overall impact of the dollar’s rally.
“The majority of the changes [in the Fed’s statement] will be concentrated in the committee’s assessment of the economy and inflation,” Ward McCarthy, chief financial economist at Jefferies, said in a note.
An important element to look out for in forward guidance is whether the outlook for policy remains data dependent and whether all meetings from here on out are “on the table” for liftoff.
If the Fed remains on its dovish premise that investors have already embraced, the market will likely push back expectations for a potential interest-rate increase to early 2016, Carbone said.
On the economic data front, a strong report on March’s pending home sales was the last bit of data before the Fed policy statement on Wednesday. The good news sparked some light selling and overall contributed to the rising trend in Treasury yields.
Investors are also looking at an auction of $29 billion in seven-year Treasury notes, which will fuel new supply into the market just an hour before the Fed statement is due.
Three auctions on Tuesday, namely $35 billion in five-year Treasury notes, $25 billion in one-year bills and $30 billion in 4-week bills, also impacted yields by enhancing a selloff in the secondary market.
