2-year Treasury yield finishes above 5% after Fed’s September meeting minutes

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  rose 2.1 basis points to 5.003% from 4.982% on Tuesday.

• The yield on the 10-year Treasury
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  declined 5.8 basis points to 4.596% from 4.654% Tuesday afternoon.

• The yield on the 30-year Treasury
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  fell 9.1 basis points to 4.737% from 4.828% late Tuesday.

• Wednesday’s levels were the lowest for the 10- and 30-year rates since Sept. 29, based on 3 p.m. Eastern time figures from Dow Jones Market Data. 

What drove markets

Minutes of the Fed’s Sept. 19-20 meeting, released on Wednesday, showed that a majority of people on the Federal Open Market Committee judged that one more rate increase at a future meeting would likely be appropriate. All FOMC participants agreed that they could proceed carefully and that their decisions at each meeting would be based on the totality of incoming information.

Earlier on Wednesday, data showed U.S. producer prices coming in a little hotter for September. The U.S. producer price index rose 0.5% in September, down slightly from an 0.7% increase in August, but above the 0.3% advance that had been expected by economists polled by The Wall Street Journal.

While the policy-sensitive 2-year yield finished above 5% on Wednesday, safe-haven flows sent longer-term rates down for a second day. News that missiles had been fired from Lebanon at Israeli positions caused the initial dip in yields during European trading.

Meanwhile, many market participants continued to think the Fed may be done raising interest rates. Ahead of Thursday’s consumer price index report for September, fed funds futures traders priced in a 91.5% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Nov. 1, according to the CME FedWatch Tool. The chance of no action by December was seen at 72.1%.

Treasury’s $35 billion of 10-year notes on Wednesday came in weak, strategists said.

What analysts are saying

“After enjoying a rally underpinned by lower oil prices and Treasury yields edging lower, and bolstered by comments from Fed speakers that the Fed may be poised to complete its interest rate hiking campaign, financial markets may not be so certain that the Fed is unanimously wedded to the so-called ‘pivot,’” said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, N.C. 

With the producer price index indicating that prices are inching higher, markets are “concerned that if ‘sticky’ core inflation doesn’t untangle at [a] faster pace, the Fed may need another rate hike, after all,” Krosby said.