Rates on 3-month and 6-month Treasury bills swung in both directions on Thursday, as traders continued to reassess the likelihood of further aggressive interest rate hikes by the Federal Reserve and considered the possibility that central banks may generally be close to reaching the limits of their monetary policy tightening.
What’s happening
- The 3-month rate was around 3.93% after climbing to as high as 4.05%, while the 6-month rate was 4.3% and spiked to as high as 4.5%
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.342% was 4.359%, down from 4.418% on Wednesday.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.928% slipped to 3.941% from 4.014% as of Wednesday afternoon.
- The yield on the 30-year Treasury TMUBMUSD30Y, 4.071% was 4.087%, down from 4.163%.
What’s driving markets
Most Treasury yields slid on Thursday — with the exception of the 3-month TMUBMUSD03M, 4.026% and 6-month rates TMUBMUSD06M, 4.456%, which toggled back and forth as investors and traders continued to reassess the likelihood of aggressive rate hikes by the Fed through year-end and into 2023.
Traders were increasingly factoring in some chance that the Fed and other central banks may be near the end of the road with aggressive rate hikes. That view is being supported by a report last week in The Wall Street Journal, which indicated policy makers are open to a debate about the size of December’s rate hike; by a smaller-than-expected rate hike by the Bank of Canada on Wednesday; and by what observers perceive to be as a dovish tone in the European Central Bank’s rate outlook.
On Thursday, the ECB, which started tightening later than many of its peers, raised its deposit rate by 75 basis points, or three-quarters of a percentage point, to 1.5%. German 10-year bund yields TMBMKDE-10Y, 1.953%, the bloc’s benchmark, nonetheless slipped 8.5 basis points to 2.032%.
Markets are pricing in a 91% probability that the Fed will raise interest rates by another 75 basis points to a range between 3.75% and 4% on Nov. 2 — down from a 98% chance seen a week ago. The central bank is still mostly expected to take its fed-funds rate target to at least between 4.75% and 5% by March, according to the CME FedWatch tool.
Data released on Thursday showed that the U.S. economy grew 2.6% in the third quarter, initial jobless claims ticked up by 3,000 to 217,000 for the week that ended Oct. 22, and durable goods rose 0.4% in September.
What analysts are saying
“Central banks are starting to reach their limit on how much tightening they can actually do,” said Tom di Galoma, managing director of rates trading at Seaport Global Holdings in Greenwich, Conn. “Yields in the U.S., the U.K., and Germany might have peaked to the point where we’re not going to see a further selloff that pushes rates higher. It’s all dependent on inflation, but my thought is that rates are now at levels where central banks feel they need to slow down,” he said via phone.