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U.S. Treasury Yields Pare Losses amid Signs of Infighting at the Fed

Last Updated September 23, 2020 1:03 PM
Sam Bourgi
Last Updated September 23, 2020 1:03 PM

U.S. government debt yields pared losses Thursday afternoon, as questions concerning monetary policy continued to swirl following the Federal Reserve’s September meetings.

Treasury Yields Rise

The price of U.S. government bonds rose late Wednesday, pushing yields down. By Thursday afternoon, bond prices had come off their highs and were trading virtually flat.

Over roughly 36 hours, the yield on the benchmark 10-year Treasury fell more than 6 basis points to a low of 1.75%, according to CNBC data. It was last seen at 1.789%, where it was little changed.

10 year treasury
Yields recover in the wake of post-FOMC volatility. | Chart: CNBC

The yield on the 2-year Treasury note also held steady at 1.748% after sliding to a low of 1.72%.

Hawkish Rate Cut

The Federal Reserve on Thursday delivered what some have dubbed  a ‘hawkish rate cut’ after policymakers failed to signal further easing measures in the coming months.

Underlying the Fed’s perceived hawkish tone is the fact that two officials voted against cutting rates. Another member thought a 50 basis-point reduction to the federal funds rate was warranted as opposed to a quarter-point cut.

Members of the Federal Open Market Committee (FOMC) are forecasting higher interest rates over the long term, possibly on the belief that the tariff war will eventually wind down with a new trade agreement between the U.S. and China.

Investors are weary of the Fed’s long-term projections because they are rarely on point and often discount underlying risks to the economy. Case in point: The Fed has never predicted recession no matter how many times it rears its ugly head.

The Fed’s rate announcement had an initial impact of driving traders away from risk assets, as evidenced by the steep fall in the Dow Jones Industrial Average (DJIA) shortly after 2:00 p.m. ET on Wednesday. Government bonds and gold rose in response.

The risk-off trade has weakened over the past 24 hours, though some government bonds remain slightly elevated.

U.S. central bankers have two more policy meetings scheduled this year – one in October and the final one in December. The chance of a third rate cut is just under 65%, according to CME Group ’s Fed Fund futures prices.