U.S. Treasury yields edged higher Wednesday after the Treasury Department announced changes to debt auctions, with investors awaiting the outcome of the Federal Reserve’s latest policy meeting.
Yields, which rise when bond prices fall, held fairly steady in the overnight session, with the 10-year yield briefly topping 3% before sliding back down again. They then held their range after the Treasury’s announcement, which revealed that it plans to make smaller reductions to the size of its fixed-rate note and bond auctions between May and July, after implementing larger cuts in recent months.
The Treasury’s announcement was broadly in line with investors’ expectations, hewing to recommendations made by a private-sector advisory committee.
In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 3.005%, according to
compared with 2.957% Tuesday. The yield has climbed above 3% a few times this week without closing there—something it last did in November 2018.
Treasury began reducing the size of its nominal coupon and two-year floating-rate note auction sizes late last year as its borrowing needs declined. The decision announced Wednesday to cut coupon auction sizes by smaller increments comes as the Fed is preparing to meet later in the day, when it is expected officials will formally announce plans to begin shrinking the central bank’s $9 trillion asset portfolio, including substantial holdings of Treasury securities.
The Fed is also expected to raise its benchmark federal-funds rate by half a percentage point as it tries to slow inflation.
Despite the potential for Fed redemptions, strong tax receipts lowered borrowing needs, allowing for the additional reductions in coupon auction sizes announced Wednesday, according to a Treasury official. Treasury said its issuance plans leave it well positioned to finance borrowing needs that may arise from Fed redemptions and that additional cuts may be necessary in future quarters.
Yields on Treasurys largely reflect investors’ expectations for what short-term interest rates will be over the life of a bond. But analysts say that changes in the amount of Treasurys circulating in the market can also affect prices, with lower supply dragging yields lower and increased supply pushing them higher.
Still, Treasury’s announcement Wednesday was “not particularly surprising,”
an interest-rate strategist at BMO Capital Markets wrote in a note to clients.
Later Wednesday, investors are also expecting few surprises when the Fed announces its interest rate-decision. But there is strong interest in what Fed Chairman
will say at a subsequent press conference.
Previous statements from Mr. Powell have played a role in driving bond yields higher this year, as he has repeatedly said that reducing inflation is the central bank’s overwhelming priority and minimized concerns that higher rates could tip the economy into a recession.
As of Wednesday morning, the target range for the federal-funds rate was between 0.25% and 0.5%, while interest-rate derivatives showed that investors expect the rate to climb above 3% next year.
Rising rate-expectations have led to a brutal few months for bond investors, dragging down the prices of Treasurys, corporate bonds and municipal debt while lifting the 10-year Treasury yield from 1.496% at the end of last year.
The Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—has returned minus 9.9% this year as of May 3.
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