Bond yields rose on Thursday as tensions eased in the European banking sector and traders awaited the European Central Bank’s decision on interest rates. What’s Happening The yield on the 2-year Treasury TMUBMUSD02Y, 3.957% rose 14 basis points to 4.020%. Yields move in the opposite direction to prices. The yield on the 10-year Treasury TMUBMUSD10Y, at 3.453%, rose 3.8 basis points to 3.504%. The yield on the 30-year Treasury TMUBMUSD30Y, at 3.635%, rose 2.4 basis points to 3.671%. What’s driving markets A calm mood in markets — after the Swiss central bank backed troubled bank Credit Suisse CSGN, +21.80% — is reducing demand for haven sovereign debt, pushing yields higher. Tensions remained below the surface as traders waited to see the European Central Bank’s monetary policy decision on Thursday. Like the Federal Reserve, investors fear that the ECB’s ability to tackle inflation by raising interest rates has been compromised by fragility in the banking sector. Until a week or so ago, the ECB was expected to raise its benchmark borrowing costs by 50 basis points to 3%. Now traders feel that a 25 basis point hike is more likely. The Federal Reserve will monitor the market’s reaction to the ECB’s move for signs of whether investors believe the monetary authorities will stick with their inflation-dampening strategy or pause now for signs of a fracture in the financial sector. According to the CME FedWatch tool, markets are pricing in a 70.1% chance that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5.0% after its meeting on March 22nd. According to 30-day fed funds futures, the central bank is expected to raise its fed funds rate target to 4.88% by May 2023. Uncertainty about the Fed’s path has caused sharp moves up and down in bond yields over the past week. This has led the ICE BoAML MOVE Index, a measure of expected volatility in Treasuries, to jump 80% since early February to its highest level since the global financial crisis in 2008. US economic updates scheduled for release on Thursday include weekly preliminary. unemployment claims; February Import Price Index; Housing starts and building permits for February; and the March Philadelphia Fed Manufacturing Report. All are at 8:30 am Eastern. What analysts say “We expect the ECB to raise rates by 50 bps today despite market volatility, but recognize that the outcome of the Governing Council meeting is highly uncertain,” said. City team of economic strategists led by Arnaud Mares. “We see the rate decision as a balancing act between the monetary stability objective and the price stability objective. The risk with a rate hike of less than 50 bps is that it is seen as a compromise between objectives, not among Governing Council members, and exposes the ECB to suspicions of monetary dominance. We believe this settlement is unnecessary,” Mares wrote in a note to clients.
