Bond Report: Treasury yields edge higher as Fed meeting gets underway and report shows U.S. inflation worsening

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Treasury yields edged higher Tuesday as Federal Reserve policy makers kicked off a pivotal, two-day meeting and the latest read on U.S. wholesale prices showed inflation is still getting worse.

What are yields doing?
  • The yield on the 10-year Treasury note

    rose to 1.443%, edging up from 1.423% at 3 p.m. Eastern on Monday.

  • The 2-year Treasury note yield

    was at 0.665%, compared with 0.642% Monday afternoon.

  • The yield on the 30-year Treasury bond

    was 1.831%, up from 1.811% late Monday.

What’s driving the market?

The focus for investors remains on the Federal Reserve and a host of other major central banks, including the European Central Bank, Bank of England and Bank of Japan, which are holding policy meetings this week.

Fed policy makers are expected on Wednesday to announce they will accelerate the wind-down of monthly bond purchases in response to inflation that continues to run hot and has proven more persistent than had been expected. The move is expected to put the Fed on track to end asset purchases by next spring, clearing the way for potential interest rate increases earlier than had been previously anticipated.

See: 5 things to watch for when the Federal Reserve announces its policy decision Wednesday

The producer price index climbed 0.8% in November, easily exceeding expectations. Economists, on average, looked for a rise of 0.5%. The producer price index rose 9.6% year-on-year in November. The data signaled that U.S. inflation is likely to remain high well into 2022.

Investors also remain attuned to the spread of the omicron variant of the coronavirus that causes COVID-19. Pfizer Inc.

said trials of its COVID antiviral pill showed it held off the risk of hospitalization or death. A study also showed that a two-dose Pfizer/BioNTech vaccination provides just 33% protection against infection by the omicron variant.

In other U.S. economic news, the National Federation of Independent Business on Wednesday said its small-business optimism index rose 0.2 percentage point in November to 98.4.

What are analysts saying?

“Apart from an accelerated taper, [Fed Chairman Jerome Powell’s] message on policy tightening going forward will be important,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a note. “In the past, Mr. Powell has said that tapering does not send a signal about tightening. But a relatively quick change in thinking on tapering — the initial taper was announced following the Nov. 2-3 FOMC meeting, and Chair Powell signaled an acceleration in the pace at the end of the month — will also have implications about how quickly policy will be normalized going forward.”