U.S. bond yields were mixed ahead of Wednesday’s expected interest rate hike by the Federal Reserve, as investors headed into longer-term government debt amid heightened geopolitical tensions.

What’s happening
  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.005% was 3.972%, up from 3.962% on Monday. Monday’s level was the highest since Oct. 17, 2007, based on 3 p.m. ET levels, according to Dow Jones Market Data. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.561% retreated to 3.53% from 3.571% as of Monday afternoon. Monday’s level was the highest since March 3, 2011.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.565% fell to 3.542% from 3.581% late Monday.
What’s driving markets

Bond yields generally stabilized as traders wait to see by how much Jay Powell and his colleagues at the Federal Reserve will raise the fed funds rate target on Wednesday.

The 10-year Treasury yield TMUBMUSD10Y, 3.561% hit an 11-year high of almost 3.6% in the previous session, after a bigger-than-expected 100 basis point interest rate hike by Sweden’s central bank reinforced fears that global monetary authorities could raise borrowing costs sharply to damp inflation running in some places at 40-year peaks.

Markets are pricing in a 82% probability that the Fed will raise its benchmark interest rate by another 75 basis points to a range between 3% and 3.25% on Wednesday. The Fed announcement is due at 2 p.m. Eastern time and a press conference held by Powell is slated to begin at 2:30 p.m.

Investors remain highly focused on the terminal rate, or level at which policy makers could end their rate hikes. SEI, an overseer of $1.3 trillion in assets, sees a likelihood that the central bank’s hiking cycle will end as high as 5%, a level that leaves interest rates twice as high as they are now. The firm sees a “reasonable base case” that the terminal rate will be between 4.5% to 5%, according to chief market strategist Jim Solloway.

On Wednesday, yields edged lower in the longer end of the Treasury curve as buyers returned, seeking the perceived safety of U.S. government bonds after Russian President Vladimir Putin escalated his war against Ukraine.

What analysts are saying

“At the end of this FOMC meeting, we would be surprised if the key takeaway was anything other than Powell and Co. (at a minimum) maintaining the current hawkish narrative they have in place,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets.

“It seems he’s [Powell] learned his lesson. The only thing he is incentivized to say at this point is that they are going to keep going until inflation is in a better place even if that means risking recession. He will continue to push that idea during the presser,” Porcelli added.