2-year Treasury yield ends at almost two-month low after Fed delivers another pause

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  was down 9.8 basis points at 4.971% versus 5.069% on Tuesday. Wednesday’s level is the lowest since Sept. 7, based on 3 p.m. Eastern time figures from Dow Jones Market Data.
• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  dropped 8.4 basis points to 4.790% from 4.874% on Tuesday. Wednesday’s level is the lowest close since Oct. 16.
• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  fell 4.8 basis points to 4.974% from 5.022% on Tuesday. Wednesday’s level is the lowest close since Oct. 24.

What drove markets

As widely expected, Fed officials voted unanimously to hold their main interest-rate target at a 22-year high of 5.25%-5.5% on Wednesday, but they left the option of a rate hike at some point on the table. Analysts focused on the part of the Fed’s policy statement which referred to the recent rise in Treasury yields, and indicated that tighter financial and credit conditions are likely to weigh on the economy.

In a post-meeting press conference, Fed Chairman Jerome Powell said officials remain strongly committed to bringing inflation back to their 2% goal and that the question they are asking is whether they should hike more. Powell also expressed a lack of confidence that interest rates are sufficiently high enough to bring down inflation.

Read: Ex–New York Fed head sees risk of four ‘fatal’ flaws in central bank’s thinking on pause

Data released earlier on Wednesday suggested that the U.S. economy might be losing momentum. The Institute for Supply Management’s index of manufacturing activity fell last month to its lowest level since July. Meanwhile, payroll processor ADP reported that 113,000 new private-sector jobs were created in October, below the 130,000 increase expected by economists polled by The Wall Street Journal.

Fiscal policy was also in focus on Wednesday, as investors absorbed an update on how the U.S. government will fund its spending. The Treasury announced that it would sell $112 billion in notes and bonds next week. This issuance will refund $102.2 billion of notes maturing on Nov. 15 and raise new cash of approximately $9.8 billion.

What analysts are saying

• “The market is interpreting the statement as dovish because the Fed expects tightening in financial conditions to slow economic activity,” said Olumide Owolabi, the Chicago-based head of the U.S. rates team at Neuberger Berman. 
• “While markets may be more focused on ‘higher for longer’ these days instead of recession risks, we are still cautious about the economic outlook,” said BeiChen Lin, investment strategy analyst at Russell Investments based in Seattle. “We believe the economic risk factors are still present, even if the market is temporarily focused on other things. Against this backdrop, we continue to think that U.S. Treasuries could be an important defensive lever in a portfolio.”