Tuesday saw the 10-year Treasury yield surge to a new 16-year high of nearly 4.57%, influenced by speculation about the Federal Reserve's future rate decisions and comments from JPMorgan (NYSE:JPM)'s CEO Jamie Dimon. However, a sudden wave of bond purchases eased yields slightly to 4.51%.
The increase in yields was driven by traders' anticipation of the release of the Federal Reserve's preferred inflation measure, the core PCE price index, due this Friday. Market expectations suggest an 82% likelihood that the Federal Reserve will maintain interest rates at a range of 5.25% to 5.50% following its meeting on November 1, according to data from the CME FedWatch tool.
For the subsequent meeting in December, there is a projected 35% chance of a quarter-point rate increase to between 5.50 and 5.75%. Projections gleaned from 30-day Fed Funds futures indicate that it is unlikely for the central bank to lower its target for the Fed funds rate to approximately 5% until September 2024.
Tuesday's economic agenda included several U.S. reports such as July's S&P Case-Shiller home price index, August's new home sales data, and September's consumer confidence report. Federal Reserve Governor Michelle Bowman was also scheduled to deliver a speech, and a $48 billion auction of two-year Treasury notes was set to take place.
Analysts attribute the recent uptick in yields to market expectations that policy rates will remain high for an extended period, as indicated by last week's Federal Reserve dot plot. They also point to growing awareness that supply levels are likely to stay high due to increasing budget deficits and modestly rising long-term inflation expectations.
These developments in the sovereign bond sector, historically undervalued, make it a more competitive asset class against others, such as equities. This shift has sparked questions about the returns equity investors should anticipate going forward.
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