Two-year yields hit 17-year highs after hawkish Fed

NEW YORK, Sept 20 – Interest rate sensitive two-year Treasury yields hit 17-year highs on Wednesday after the Federal Reserve held interest rates steady but stiffened its hawkish stance for future policy.

The US central bank projected a further rate increase by the end of the year and expected monetary policy to be significantly tighter through 2024 than previously thought.

“It looks as though the Fed is trying to send as hawkish a signal as it possibly can,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York. “It’s just a question of how the data evolves from here.”

The two-year yields reached 5.152%, the highest since July 2006, and were last at 5.135%. Five-year yields hit 4.547%, the highest since August 2007, and were last 4.522%.

Benchmark 10-year note yields jumped to 4.359% and were last 4.347%. They reached 4.371% on Tuesday, the highest since November 2007.

The inversion in the yield curve between two-year and 10-year notes deepened to minus 80 basis points.

Fed funds futures traders are still pricing in only a partial chance of a further rate hike, with a 29% probability in November and 43% chance by December, according to the CME Group’s FedWatch Tool.

As they did in June, Fed policymakers at the median still see the central bank’s benchmark overnight interest rate peaking this year in the 5.50% to 5.75% range, just a quarter of a percentage point above the current range.

But from there the Fed’s updated quarterly projections show rates falling only half a percentage point in 2024 compared to the full percentage point of cuts anticipated at the meeting in June.

“The decrease in the number of cuts in 2024 is one of the more telling changes this month,” said Andrew Patterson, senior economist at Vanguard. “It means that the Fed is increasingly confident that they can pull off a soft landing and that the economy can withstand higher rates for longer.”

Analysts this week said that higher oil prices have helped to drive yields higher on concerns that inflation will remain elevated.

Fed Chairman Jerome Powell, however, disagreed on Wednesday, saying instead that higher yields reflect market views of better growth and the impact of higher Treasury bond supply.

Sept. 20 Wednesday 3:30 PM New York / 1930 GMT

(Reporting by Karen Brettell; Additional reporting by Herb Lash; Editing by Chizu Nomiyama, Will Dunham, and Josie Kao)