Shorter-dated US Treasury yields surge in anticipation of another Fed rate hike

Two-year Treasury yields extended gains as Fed chief Kevin Warsh spoke and hit 4.738%, their highest level since July 2024. The benchmark 10-year yield turned higher.

The decision on the rate increase, which was the Fed’s first in over three years, was unanimous.

New policy projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year. Warsh did not submit a rate projection.

Also Read: A 25 bps hike: US Federal Reserve raises interest rates for first time since 2023

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“I’m looking at the two-year here, though, and … it’s coming back up higher here. So, maybe it helps the long end a little bit, but the front end’s still worried about another hike later this year, and then who knows what for 2027,” said JP Powers, chief investment officer at RWA Wealth Partners in Boston.
Market bets on a rate hike at the Fed’s next meeting in late October ticked higher to 56.5% from 54% prior to the hike, according to CME Group’s FedWatch Tool.The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, was last up 5.1 basis points at 4.715%.

Also Read:US Fed chair Kevin Warsh explains why the Federal Reserve raised interest rates

The yield on the benchmark U.S. 10-year Treasury note was last down 0.2 basis points at 4.994% after briefly turning higher.The yield on the 30-year bond fell 2.5 basis points to 5.338%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 27.5 basis points, the flattest since June 30.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.366% after closing at 2.417% on Tuesday.

The 10-year TIPS breakeven rate was last at 2.344%, indicating the market sees inflation averaging about 2.3% a year for the next decade.