(Bloomberg) — The US bond market’s recovery was cut short by a Federal Reserve official’s mere mention of the possibility of an interest-rate increase.
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In response to a question during a conference in Washington, New York Fed President John Williams on Thursday said another rate hike isn’t his base case. But he also said that “if the data are telling us that we would need higher interest rates to achieve our goals, then we would obviously want to do that.”
Treasury yields, which were already headed higher after the latest US economic data, subsequently rose further. The move was led by the two-year yield, which climbed as much as 5 basis points to nearly 4.99%, near the high end of its recent range.
“We’ve done this round trip in terms of Treasury yields, and we’re right back to where we started a few months ago,” Aoifinn Devitt, Moneta chief global market strategist, told Bloomberg Television. “It just puts everything in question again.”
Read More: New York Fed’s Williams Sees No Urgency to Cut Interest Rates
Money managers and strategists on Wall Street have been forced to rethink their assumptions over the past two weeks in response to strong economic data and remarks by Fed officials.
The yield on policy-sensitive two-year Treasuries peaked this week at just over 5%, the highest level since November, after Fed Chair Jerome Powell appeared to endorse the bond market’s recent paring of expectations for interest-rate cuts this year.
On Thursday, swap rates that predict Fed decisions edged higher, pricing in a cumulative 38 basis points of rate cuts by the December policy meeting — compared with 43 basis points as of Wednesday close. An initial quarter-point cut remains priced in for the November policy meeting.
The market-implied odds of another Fed rate hike — following 11 from March 2022 to July 2023 — remain close to nil.
Still, in the interest-rate options market, protection from the possibility of rates rising — or, at least, not falling — has been in vogue.
Economic indicators in recent weeks showing a robust jobs market, sticky inflation and stronger-than-anticipated retail sales sowed anxiety about whether the Fed will deliver on the three quarter-point rate cuts this year that it forecast in March.
A gauge of Treasuries has handed investors losses of nearly 2% so far this month, wiping out March’s 1.3% advance, according to data compiled by Bloomberg.
But for some on Wall Street, including JPMorgan Asset Management’s Kelsey Berro, higher yields offer a reason to buy. In fact, investors had flocked to an auction of 20-year bonds on Wednesday.
“We think there are limits to how much further yields can rise because the Fed is still in a mode where they think they’ve done enough,” she said on Bloomberg Television.
–With assistance from Edward Bolingbroke.
(Updates prices and adds context, comments throughout.)
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