Treasuries Extend Downward Trend As Fed Decision Looms

Treasuries regained ground after moving sharply lower in morning trading on Tuesday but remained firmly negative.

Bond prices pulled back off their recovery highs going into the close of trading. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, climbed 8.1 basis points to 3.571 percent.

The ten-year yield gave back ground after reaching an intraday high of 3.602 percent but still ended the session at an eleven-year closing high.

Treasuries extended the downward trend seen over the past several weeks as traders looked ahead to the Federal Reserve’s monetary policy decision on Wednesday.

The Fed is widely expected to raise interest rates by another 75 basis points, although some see an outside chance for a 100 basis point rate hike.

CME Group’s FedWatch Tool is currently indicating an 84.0 percent chance of a 75 basis points rate hike and a 16.0 percent chance of a 100 basis point rate hike.

“Yields are surging as the inflation fighting Fed is expected to remain relentless with the tightening of policy, which is raising the risk of a severe recession,” said Edward Moya, senior market analyst at OANDA.

He added, “The Fed begins their two-day policy meeting and while a 75-basis-point expectation is widely expected, the key messaging by Fed Chair Powell might be that rates will stay elevated for much longer than what the market is expecting.”

Several of other major central banks around the world are also scheduled to announce their latest monetary policy decisions this week, including the Bank of England and the Bank of Japan.

On the U.S. economic front, the Commerce Department released a report showing an unexpected spike in new residential construction in the U.S. in the month of August, although the report also showed a steeper than expected slump in building permits.

The report showed housing starts soared by 12.2 percent to an annual rate of 1.575 million in August after plunging by 10.9 percent to a revised rate of 1.404 million in July.

The sharp increase surprised economists, who had expected housing starts to edge down by 0.1 percent to an annual rate of 1.445 million from 1.446 million originally reported for the previous month.

Meanwhile, the Commerce Department said building permits plunged by 10.0 percent to an annual rate of 1.517 million in August after slipping by 0.7 percent to a revised rate of 1.685 million in July.

Economists had expected building permits, an indicator of future housing demand, to tumble by 4.5 percent to an annual rate of 1.610 million from the 1.674 million originally reported for the previous month.

Traders largely shrugged off the results of this month’s auction of $12 billion worth of twenty-year bonds on Tuesday, which attracted above average demand.

The twenty-year bond auction drew a high yield of 3.820 percent and a bid-to-cover ratio of 2.65, while the ten previous twenty-year bond auctions had an average bid-to-cover ratio of 2.54.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Trading on Wednesday is likely to be driven by reaction to the Fed’s interest rate decision as well as the accompanying statement.

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