10-year Treasury yield pulls back from 3% as two-day Fed meeting kicks off

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Treasury yields drifted lower Tuesday morning, a day after the 10-year note brushed the 3% threshold for the first time since December 2018, with investors preparing for this week’s Federal Reserve decision.

What yields are doing
What’s driving the market
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With the Federal Reserve kicking off a two-day policy meeting on Tuesday, policy makers are widely expected to deliver an outsize 50 basis point, or half a percentage point, interest rate increase as opposed to the typical quarter-point move. They’re also expected to announce a plan to rapidly shrink the central bank’s nearly $9 trillion balance sheet.

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Fed’s half-percentage point rate hike seen baked in the cake

The Fed is seen moving aggressively as it struggles to rein in inflation running at its highest in four decades.

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Data released on Tuesday showed US job openings climbed to a record 11.55 in March and the number of people quitting also hit an all-time high, in another sign of a historically tight labor market. Meanwhile, factory orders were up 2.2% last month.

The yield on the 10-year German bond TMBMKDE-10Y,
0.971%,
Known as the bund, arguably the most important financial instrument in Europe, reached the 1% level on Tuesday for the first time in nearly seven years. It had traded in negative territory as recently as March.

The Reserve Bank of Australia raised its official cash rate for the first time since November 2010 on Tuesday as it seeks to tame inflation running at its highest in 20 years. The RBA raised its official cash rate to 0.35% from a record low 0.10%, a larger-than-expected move, with the RBA signaling more increases likely in coming months.

What analysts say

“Just as consequential for the overall market as the outright level of rates is the speed with which the move toward higher yields has occurred. A slow, grinding move toward a positive real yield environment that does not unduly tighten financial conditions or drive a faster selloff in domestic equities is the variety of response that would give the Fed cover to proceed aggressively,” wrote strategists Benjamin Jeffery and Ian Lyngen, in a note.

“The S&P 500 SPX,
+0.50%
down 14% [year to date] and the NASDAQ comp,
+0.15%
21% in the red over the course of 2022 reinforces the tech sector’s sensitivity to higher discount rates,” they wrote.

Powell wants to get rates closer to neutral. But what’s that? Think between 5% and 6%, former top Fed staffer says

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Credit: www.marketwatch.com /

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