Ten-year Treasury yields hold near cycle highs with Fed meeting eyed

Yields have crept up in recent weeks as oil prices climbing to 10-month highs and some stronger-than-expected economic data have raised concerns about revived inflationary pressures.

Markets are pricing in a 99% probability that the Fed will leave its policy interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on September 20, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 31%, down from 41% a week ago.

The central bank is not expected to take its Fed funds rate target back down to around 5% until August 2024, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Tuesday include housing starts and building permits for August, due at 8:30 a.m. Eastern.

The Treasury will auction $13 billion of 20-year bonds on Tuesday.

What are analysts saying

Alex Pelle, U.S. economist at Mizuho, said that investors will be paying particular attention on Wednesday to the Fed’s Summary of Economic Projections (SEP) and the dot plot of expected interest rates.

“The biggest divergence between the ‘dot plot’ and short-term rates futures has actually emerged further out the calendar: Markets are pricing the Fed returning its policy rate to the 3.75-4.00% range over time, while the latest ‘dot plot’ shows the Fed expects to lower rates to 3.25-3.50% by year-end 2025 and then on to 2.5% over time,” Pelle said in a note.

“The latter points indicate that the market is still attuned to upside growth and inflation risk. Given the backdrop of Treasury supply, a pre-mature dovish tone in the SEP or post-meeting press conference risks a further leak higher in long-term rates.” he added.