Bond Report: Most Treasury yields move higher as investors factor in another half-point rate hike for September

What yields are doing

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.921%
rose to 2.9122%, up from 2.842% at 3 p.m. Eastern on Tuesday.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.649%
was 2.65%, up from 2.54% Tuesday afternoon.

The 30-year Treasury bond
TMUBMUSD30Y,
3.087%
yielded 3.08% versus 3.056% late Tuesday.

What’s driving the market

Front-end and intermediate Treasury yields rose as investors reassessed their expectations for the path of the Fed’s interest rate policy, with hopes for either a pause in rate hikes or 25-basis point hike in September starting to slip away.

Atlanta Fed President Raphael Bostic told MarketWatch on Tuesday he had recently suggested a possible September “pause” in rate increases because the market’s initial response to the Fed’s shift to raising rates “was far stronger than what we’ve historically seen.”

Exclusive: Fed’s Bostic says idea of September pause is not tied to any looming market rescue

This raises the possibility that the broader economy will respond quickly to the Fed’s rate hikes, as well, Bostic said. However, he dismissed the suggestion that any pause could be construed as a “Fed put,” or belief that the central bank would come to the rescue of markets.

Investors remain concerned that inflation continues to run at a hot pace, while also worrying about the ability of the Federal Reserve to get price pressures under control without sinking the economy.

The Fed raised its key interest rate by 50 basis points, or half a percentage point, in May. Fed Chair Jerome Powell has said that half-point moves are on the table at the central bank’s next two policy meetings.

Meanwhile, the Fed will start allowing bonds that mature to roll off its nearly $9 trillion balance sheet without replacing them as of Wednesday, beginning the unwind of its balance sheet, a process known as quantitative tightening.

See: Fed to begin quantitative tightening: What that means for financial markets

As of June, the Fed will reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities by a combined $47.5 billion per month for the first three months. After this, the total amount to be reduced goes up to $95 billion a month, with policy makers prepared to adjust their approach.

In data released Wednesday, S&P Global’s final purchasing managers index reading for the U.S. manufacturing sector slipped to 57.0 in May versus a 57.5 flash estimate, while the Institute for Supply Management’s manufacturing index rose to 56.1% in May from 55.4% in the prior month. U.S. job openings fell to 11.4 million in April from a record 11.9 million in the prior month, while some 4.4 million workers quit jobs. The job-quitting rate was unchanged at 2.9%.

Still ahead for Wednesday are the Fed’s Beige Book report on economic conditions, which is set for release at 2 p.m. Eastern time, and St. Louis Fed President James Bullard, who is due to speak at 1 p.m.

What analysts say

“Treasury yields are off the lows and momentum has shifted in favor of further weakness in the run-up to Friday’s employment report,” said Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital Markets, in a note.

“While the weekly charts remain constructive in the medium-term, the ability of risk assets to retain a portion of last week’s bounce has instilled a degree of solace in the investment outlook and implies the Fed still has room to follow-through on its stated path of normalization before risking a surge tighter in financial conditions. At least for now,” they wrote.