U.S. government bonds yields rose sharply Wednesday after the Federal Reserve said it would lift short-term interest rates and signaled they could reach nearly 2% by the end of the year.
In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 2.239%, according to Tradeweb, compared with 2.160% Tuesday. The two-year Treasury yield—which is especially sensitive to changes in monetary policy—was recently 1.989%, up from 1.855% Tuesday.
Yields, which rise when bond prices fall, had drifted higher earlier in the session but added to those gains immediately after the Fed released its latest policy statement, which stated that the central bank would raise its benchmark federal-funds rate by a quarter percentage point to a range between 0.25% and 0.5% from near zero. A forecast for interest rates showed officials think rates could rise to roughly 1.9% by the end of 2022 and 2.8% by the end of next year.
Heading into Wednesday, yields had climbed substantially in recent sessions to their highest levels since 2019 as investors prepare for a new regime of tighter monetary policies.
This year has been a tough one for bond investors. When inflation started to accelerate last year, investors for months thought that it could subside on its own, allowing the Fed to keep short-term interest rates near zero. Those views, though, changed quickly this year due largely to a shift in tone from Fed officials, who began expressing more concern about inflation and an eagerness to start raising rates.
This year’s one significant bond rally came at the end of February when Russia first invaded Ukraine, casting uncertainty over the economic outlook.
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More recently, though, investors have grown more skeptical that the invasion could keep a lid on interest rates. Some have argued that higher commodity prices spurred by the invasion might only further stoke inflation, putting even more pressure on the Fed to tighten policy. Meanwhile, energy prices have already come down from their recent highs, driven in part by hopes for a negotiated settlement between Russia and Ukraine. That has eased the concerns of those that thought the higher prices could have the opposite effect: slowing economic growth and making it harder for the Fed to raise rates.
The Fed on Wednesday was seen as all but certain to raise its target for overnight interbank borrowing rates by a quarter percentage point to between 0.25% and 0.5%. As a result, investors are primarily focused on the Fed’s so-called dot plot, showing where individual officials expect rates to head over the next few years. They will also gauge the overall tone of Fed Chairman
Jerome Powell’s
news conference, looking to see whether officials are becoming even more worried about inflation.
Regardless of what officials say Wednesday, monetary policies—and therefore bond yields—will still be largely determined by the state of the economy.
On that front, new data showed Wednesday morning that retail sales rose a seasonally adjusted 0.3% in February, below analysts’ forecasts for a 0.4% increase. At the same, sales for January were revised upward to 4.9% from 3.8%.
Treasury yields were little changed after the report. In a note to clients, Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote that the data showed “a troubling trajectory” but that the upward revisions to January sales did “take the edge off of the disappointing Feb numbers.”
Write to Sam Goldfarb at sam.goldfarb@wsj.com
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