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Markets

Yields erase earlier rise to be little changed before Fed meeting statement

  • Business reopenings from COVID-19-related shutdowns have accelerated this month, and investors are also pricing for higher inflation as fiscal spending increases.
  • "With the reopening process, it seems to have hit a higher gear in April," said Tom Simons, a money market economist at Jefferies in New York.
28 Apr 2021

NEW YORK: US Treasury yields gave back earlier gains on Wednesday before the Federal Reserve is due to conclude its two-day meeting, with investors focused on whether the US central bank will give any hints towards removing its unprecedented accommodation as the American economy improves.

Business reopenings from COVID-19-related shutdowns have accelerated this month, and investors are also pricing for higher inflation as fiscal spending increases.

"With the reopening process, it seems to have hit a higher gear in April," said Tom Simons, a money market economist at Jefferies in New York.

Investors will be watching to see whether the Fed indicates that it may taper its bond purchases as the economy bounces back, though the Fed is viewed as unlikely to give any firm signals that tightening is near.

"There has to be an acknowledgement that its somewhere out there on the timeline, but I think that's about as far as we're going to go," Simons said. "It's more likely at the next meeting we get something more concrete on that front.

"It's going to be more or less a tightrope walk trying to acknowledge what's gone on in the economy over the inter-meeting period, which has pretty much all been positive, while also not really saying that the Fed is any closer to pulling back on accommodation," he added.

Benchmark 10-year Treasury yields have pulled back from one-year highs of 1.776% reached last month, and have been trading at the bottom end of their recent range before rising this week.

The 10-year yields were last little changed on the day at 1.627%, after earlier rising to 1.652%.

Inflation expectations, meanwhile, hit eight-year highs, with breakeven rates on 10-year Treasury Inflation-Protected Securities pricing in average annual inflation of 2.43% for the next decade.

Gross domestic product data on Thursday is expected to show strong growth in the first quarter, while next week's employment data for April should also show an improving labor market.

US President Joe Biden will address Congress on Wednesday with his plans to spend $1.5 trillion on childcare and college education and raise taxes on wealthy Americans to pay for it. That is on top of a $2 trillion jobs-and-infrastructure plan paid for by raising taxes on US companies.

Market participants will also watch to see whether the US central bank raises the interest it pays on excess reserves (IOER) and overnight reverse repurchase agreements as borrowing rates in repo intermittently trade negative and short-term bill yields approach zero.