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Bond Report: 10-year Treasury yield climbs to another three-year high after Fed’s March meeting minutes

The 10-year Treasury yield climbed to its highest level since March 2019 on Wednesday after the Federal Reserve’s latest meeting minutes indicated that policy makers tentatively plan to reduce the central bank’s balance sheet by about $95 billion per month.

The minutes also revealed that many officials said “one or more” 50 basis point interest rate hikes could be appropriate going forward.

Read: Fed primed to jack up interest rates in 1/2-point steps if inflation stays high

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.604%

rose 5.2 basis points to 2.606% from 2.554% at 3 p.m. Eastern on Tuesday. Wednesday’s level was the highest since March 19, 2019, based on 3 p.m. yields, according to Dow Jones Market Data.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.493%

marginally declined to 2.5% from 2.502% Tuesday afternoon. Tuesday’s level was its highest since March 6, 2019.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.618%

rose 4.9 basis points to 2.631% from 2.582% late Tuesday. That’s the highest level since July 16, 2019.

What’s driving the market?

Minutes from the Fed’s March 15-16 policy meeting confirmed that the Fed’s balance-sheet reduction may start as soon as May, and that officials could eventually resort to selling off mortgage-backed securities on the Fed’s balance sheet. The record of the gathering also showed that many policy makers would support one or more half percentage point rate hikes if inflation remains high or gets worse.

Traders are bracing for the steepest pace of monetary tightening by the Fed since 1994, when policy makers delivered 250 basis points worth of rate increases in a single year. Fed funds futures currently reflect a better-than-50% chance that the the central bank’s main policy-rate target will get to at least between 2.5%-2.75% by year-end — up from 0% to 0.25% in January.

On Wednesday, U.S. stocks headed for a second day of declines. Technology shares and other so-called growth stocks have been sinking since Tuesday as the result of rising yields. Meanwhile, the 10-year yield traded above the 2-year yield, undoing a recent inversion of that closely-followed part of the yield curve.

See: Stock market in for ‘rough ride’ after ‘tough talk’ on Fed balance sheet, says economist

Investors also continue to monitor developments in Ukraine. The U.S. announced on Wednesday that it would impose new sanctions on Russia over its invasion of Ukraine, after evidence of alleged war crimes emerged as Russian forces pulled back from the area around Kyiv.

What are analysts saying?

“The market was bracing itself for something a little more hawkish,” said David Petrosinelli, senior trader at InspereX in New York.  “There had been some talk around $100 billion or higher in monthly bond runoffs.”

As a result of the minutes, the market was calmed by the idea that policy makers are “not going to take a hammer to the market,” Petrosinelli said via phone. 

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