US Treasury yields moved higher on Wednesday as investors prepared for the Federal Reserve’s latest interest rate decision. The move contrasted with continued gains across European bond markets, where government debt rallied for a fifth consecutive session.
US Treasury Yields Rise Before Fed Decision
The yield on the benchmark 10-year US Treasury note climbed to 4.43% by 8:07 a.m. ET.
Meanwhile, the yield on the two-year Treasury note rose to 4.056%. Short-term yields are closely linked to expectations for Federal Reserve monetary policy.
The Fed is widely expected to leave its benchmark interest rate unchanged. However, investors will closely examine the policy statement and Warsh’s first press conference for signals about the future direction of borrowing costs.
Markets Assess Risk of a December Rate Hike
Any unexpectedly hawkish message from the Federal Reserve could force markets to reconsider their current interest rate expectations.
According to the CME FedWatch tool, traders are pricing in a 42% probability of a rate increase in December.
Comments about inflation, economic growth and the future path of monetary policy could therefore trigger significant moves across global bond and currency markets.
Oil Prices Fall on Iranian Supply Expectations
Crude oil extended its recent decline following reports that Washington would formally waive sanctions affecting Iranian oil exports.
The expected restoration of oil shipments through the Strait of Hormuz could return significant supplies to the global market.
Additional Iranian crude could help lower energy prices and reduce one of the main sources of inflationary pressure affecting major economies.
Lower Oil Prices Support Eurozone Bonds
Falling energy prices have strengthened expectations that the European Central Bank may adopt a less restrictive monetary policy stance.
Energy-driven inflation has complicated the ECB’s efforts to control consumer prices. However, easing geopolitical tensions and recovering oil supplies could reduce the need for further aggressive policy action.
This outlook encouraged investors to continue buying Eurozone government bonds.
Eurozone Inflation Sends Mixed Signals
Eurozone inflation data showed that consumer prices accelerated on an annual basis in May.
However, inflation slowed compared with the previous month. The monthly decline offered some reassurance to policymakers assessing the economic consequences of the recent energy shock.
The figures supported hopes that inflationary pressures could continue to ease as global energy markets stabilise.
German Bond Yields Reach Multi-Month Lows
The yield on Germany’s benchmark 10-year Bund declined to 2.92%, its lowest level since early April.
The yield on the policy-sensitive two-year German note also fell, reaching 2.58%.
Short-term German bond yields closely reflect expectations for future ECB interest rate decisions. Their decline indicates that investors are pricing in a more supportive monetary policy outlook.
British Government Bond Yields Decline
British government bonds also strengthened alongside the wider rally in European fixed-income markets.
The yield on the UK 10-year gilt fell to 4.74%, reaching its lowest level since the middle of April.
The two-year gilt yield declined to 4.13%. This maturity is particularly sensitive to expectations surrounding Bank of England interest rate policy.
