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Bond Report: 30-year Treasury yield slips ahead of Fed decision

The yield on U.S. Treasury 30-year bonds edged lower Wednesday morning, though the yields on the 10-year and 2-year maturities were slightly higher, as investors awaited the outcome of a Federal Reserve meeting that’s expected to produce a plan for tapering monthly asset purchases and clues to the timing of eventual interest-rate increases.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.563%

was 1.552%, compared with 1.546% at 3 p.m. Eastern on Tuesday.

The 2-year Treasury yield
TMUBMUSD02Y,
0.497%

edged up to 0.474%, compared with 0.454% on Tuesday afternoon. The 2-year note saw its biggest one-day fall since March 23, 2020, on Tuesday, a day after ending at a 19-month high.

The 30-year Treasury bond yield
TMUBMUSD30Y,
1.942%

edged down to 1.939% versus 1.958% on Tuesday afternoon.

What’s driving the market?

The Federal Reserve is fully expected to lay out its schedule for scaling back and eventually ending its monthly asset purchases. Investors will be focused on whether Fed Chairman Jerome Powell pushes back on growing speculation that the end of the tapering process, expected in mid-2020, will be quickly followed by rate increases.

Read: Fed seen announcing start of a ‘taper’ of bond purchases this week

Investors will also be closely watching for any changes in the Fed’s assessment of inflation pressures, which officials have largely insisted would be transitory. The yield curve — a line plotting yields across maturities — has flattened significantly amid rising short-term rates since late September as investors began to price in a more aggressive policy response from the Fed than previously expected in response to persistent inflation pressures.

See: 5 things to watch for when Fed meets Wednesday

The Fed will release its policy statement at 2 p.m. Eastern, followed by Powell’s news conference at 2:30 p.m.

Earlier on Wednesday, data showed that privately run U.S. businesses created a fairly strong 571,000 new jobs in October, based on an ADP survey, in a sign companies are still managing to find workers despite the biggest labor shortage in decades. The increase in hiring was larger than expected, with economists surveyed by The Wall Street Journal expecting a 395,000 gain.

The ADP report was being used by investors for clues to Friday’s October jobs report from the U.S. Labor Department, though the relationship between the ADP data and official numbers isn’t particularly strong.

Meanwhile, IHS Market’s final reading of the services-sector purchasing managers index for October came in at 58.7 versus an initial reading of 58.2. The Institute for Supply Management’s closely watched index of services sector activity surged to 66.7% in October from 61.9%, above forecasts. Separately, U.S. September factory orders climbed 0.2%.

What are analysts saying?

“We think Powell will go to great lengths to drive home (as he did at the last FOMC meeting) that while the conditions for taper have been met, the conditions for [rates] liftoff have not,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets, in a note. “Of course, as our `22 growth/inflation forecasts highlight, we certainly believe conditions will be met for a hike next year — the open question is how many hikes.”

“The September postmeeting statement stated that, ‘Inflation is elevated, largely reflecting transitory factors.’ We expect the statement to keep this wording, particularly given the recent upside news to inflation is largely driven by energy prices,” wrote analysts at UniCredit. “But Chair Powell is likely to acknowledge that inflation is expected to move up and stay higher for longer than the Fed initially anticipated, and that uncertainty over the inflation outlook is high.”

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