Treasury yields climb as Fed holds rates steady
Summary
The Fed holds short-term rates steady but indicates at least one rate hike in 2022 as U.S. economic recovery continues.
FOMC meeting
The Federal Open Market Committee (FOMC) met on Tuesday, September 21 and decided to keep the federal funds rate in a target range of 0 to 0.25 percent. Chair Powell cited that maintaining rates near zero will continue to support the U.S. economic recovery as the country makes progress on COVID-19 vaccinations. The committee may also consider a gradual tapering of its asset purchases if market recovery remains consistent with broader trends. A revised Fed dot plot also shows that 9 of the 18 members expect at least one rate hike by the end of 2022, signaling that the Fed could look to raise rates sooner than expected. While the initial market reaction was a bit delayed, the 10-year treasury climbed from 1.303% on Wednesday, to 1.479% as of the time of writing, increasing conversations with our corporate clients looking to issue and hedge fixed rate debt in the coming months.
(Related insight: Read "Managing interest rate risk on future debt issuances")
The Fed also released revised economic projections for 2021. The U.S. unemployment rate and core PCE (excluding food and energy prices) were revised upwards to 4.8% and 3.0% from June’s expectations of 4.5% and 3.0% respectively. Growth in GDP was revised down to 5.9% from June’s expectations of 7.0%. The dollar immediately strengthened to a one-month high following the FOMC meeting and remained stable for a few days before retreating towards the end of the week.
(Related insight: Read “Six key steps to implementing an operational FX program”)
Evergrande crisis
News related to Evergrande, China’s second largest real estate developer, weighed down on global equity and bond markets as headlines reported the company would not be able to fulfill $83M of interest payments on its 5-year dollar bond. While the People’s Bank of China (PBC) has injected some cash into the financial system to boost short-term liquidity, investors continue to watch whether Evergrande will meet its debt obligations and if the PBC will intervene further.
The week ahead
Following the FOMC meeting, markets will focus on a deluge of data as durable home sales, consumer confidence, initial jobless claims and manufacturing figures are scheduled to be released throughout the week.
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