Treasury Yields Rise After Fed's Williams Suggests No Rate Cut is on the Horizon

Yields on U.S. government debt rose on Wednesday morning, with the 2-year Treasury yield rebounding from a five-month closing low. This shift occurred after a key Federal Reserve official emphasized the need for more substantial data on inflation before supporting a rate cut.

‍

Current Market Movements:

• The yield on the 2-year Treasury climbed 2.4 basis points to 4.469%, up from 4.445% on Tuesday. Tuesday’s closing level was the lowest since February 7.
• The yield on the 10-year Treasury increased by less than 2 basis points to 4.184%, from 4.168% on Tuesday.
• The yield on the 30-year Treasury also rose by less than 2 basis points to 4.390%, from 4.374% on Tuesday.

‍

Market Drivers:

New York Fed President John Williams, in an interview with the Wall Street Journal, indicated that an interest-rate cut is unlikely later this month. Williams, who is the only regional Fed president with a voting right at every Federal Open Market Committee meeting, suggested that while officials are moving closer to considering a rate cut, they are not yet ready to take that step.

‍

On Wednesday, fed-funds futures traders assigned a 98.1% probability that the Fed will cut interest rates by at least a quarter-point by September, according to the CME FedWatch Tool. Traders also largely expect three quarter-point rate cuts by the end of the year, which would lower the fed-funds rate target to between 4.5% and 4.75%.

‍

Economic data released on Wednesday showed positive trends in the housing market. Housing starts increased to a 1.35 million annual pace in June, surpassing expectations as builders initiated new projects. Building permits, an indicator of future construction activity, rose by 3.4% to a rate of 1.45 million. Additionally, U.S. industrial production increased for the second consecutive month in June.

‍

Later in the day, the results of the Treasury’s $13 billion auction of 20-year bonds were expected just after 1 p.m. Eastern time, and the Fed's Beige Book, a compilation of economic anecdotes, was set to be released at 2 p.m.

‍

International Market Context:

In the U.K., government bond yields rose following a report showing that Britain’s annual inflation rate remained at the Bank of England's 2% target in June. However, price pressures within the service sector remained persistently high.

‍

These developments highlight the market’s sensitivity to Fed communications and economic data. The cautious stance by John Williams and the ongoing analysis of inflation data underscore the complex balancing act faced by the Fed as it navigates its monetary policy decisions.

‍