US Treasury bond yields have declined moderately, while market participants are preparing for the announcement of the results of the Fed meeting, which are surrounded by uncertainty amid recent turmoil in the banking sector.
The yield on 5-year Treasury bonds fell by 3.3 basis points, reaching 3.713%, while the yield on 30-year bonds was 3.73% (-0.6 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 3.2 basis points to 4.145%, while the yield on 10-year bonds fell to 3.592% (-1.4 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 55 basis points.
As for the Fed meeting, traders mainly expect the Fed rate to increase by 25 basis points, to 5% (the highest level since 2007, on the eve of the global financial crisis), which is half the increase by 50 bps expected before the banking crisis, caused by the collapse of Silicon Valley Bank and Signature Bank. According to the CME FedWatch Tool, the markets now see an 87.8% chance of a 25 basis point rate hike and a 12.2% chance that they will remain at the current level. If the forecast is confirmed, it will be the ninth consecutive increase in the interest rate and the second consecutive increase of 0.25%. Meanwhile, some economists believe that policymakers may pause to strengthen financial stability. They note that historical data suggests that the FOMC tends to avoid tightening monetary policy during periods of financial stress and prefers to wait until the extent of the problem becomes clear, unless it is confident that other policy instruments will successfully contain financial stability risks.
In addition to the rate decision, policymakers are set to issue updated rate projections (for the first time since December), offering crucial guidance on whether they still expect any additional hikes this year. The Fed will release its policy statement and new economic projections at 18:00 GMT.