Two-year Yields Highest Since 2007 Before Fed Decision

U.S. One dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. Reuters

Two-year Treasury yields hit 4% on Wednesday for the first time since 2007 before the Federal Reserve is expected to hike interest rates by another 75 basis points and indicate further rates are likely as it battles soaring inflation.

Yields have increased this week as investors bet that the Fed will adopt a more hawkish tone and signal that it plans to keep rates high and monetary policy restrictive.

Fed Chairman Jerome Powell is also expected to maintain that the U.S. central bank remains committed to hiking rates even if growth starts to waver.

"He's really trying everything he can to make sure that the market understands his commitment to bringing inflation down and this idea that they're not going to take their foot off the gas at the first sign that the economy is weakening," said Thomas Simons, a money market economist at Jefferies in New York.

Two-year yields reached 4.008%, the highest since October 2007. Benchmark 10-year note yields were last at 3.557%, after reaching 3.604% on Tuesday, the highest since April 2011.

The closely watched yield curve between two-year and 10-year yields was at minus 45 basis points.

Real yields, which adjust for expected inflation, also dipped on Wednesday.

Five-year yields on Treasury Inflation-Protected Securities (TIPS) fell to 1.303%, from a high of a 1.323% on Tuesday, which was the highest since August 2009. 10-year TIPS yields fell to 1.170%, from 1.219% on Tuesday, the highest since February 2011.

Yields had eased earlier on Wednesday as concerns about an escalation of the war between Russia and Ukraine modestly boosted demand for safe haven U.S. debt.

That might limit the effect of any potential sell-off on a hawkish Fed today.

"In light of the risk-off backdrop created by the Kremlin's announcement, it's difficult to envision an outsized bearish response to the FOMC's decision; at least not in the long end of the curve," BMO Capital Markets interest rate strategists Ian Lyngen and Benjamin Jeffery said in a report.

"If nothing else, the escalation of geopolitical tensions takes 100 bp off the table; although we're skeptical it was ever under serious consideration," they said.

Traders are pricing in a 19% chance of a 100 basis points increase on Wednesday.

September 21 Wednesday 11:14AM New York / 1514 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 3.2725 3.3456 -0.002

Six-month bills 3.7925 3.9203 0.018

Two-year note 98-157/256 3.9994 0.035

Three-year note 98-176/256 3.971 0.034

Five-year note 97-42/256 3.7591 0.006

Seven-year note 96-140/256 3.6934 -0.003

10-year note 93-80/256 3.5573 -0.016