Treasury yields across the curve continued to rise on Tuesday following two straight weeks of declines as traders sold government paper ahead of the Federal Reserve’s policy meeting on Wednesday, which could set the market up for the looming normalization of the central bank’s balance sheet.
The 10-year benchmark yield added 3.6 basis points to 2.293%. The 2-year note yield gained 1.2 basis point to 1.378%, while the 30-year bond yield rose 4.2 basis points to 2.877%. Bond prices move inversely to yields.
Fed policy makers will head into a two-day meeting on Tuesday and release the policy statement on Wednesday. Although analysts say the Federal Open Markets committee, its interest-rate setting body, is unlikely to start the balance sheet tapering on Wednesday, the FOMC could help brace investors for a September announcement by saying it could happen sooner rather than later. Some analysts feel a large price-insensitive buyer leaving the market could drain liquidity, and hurt stock and bond prices.
”Shrinking the balance sheet is likely to reverse the portfolio rebalancing effects of quantitative easing—which lowered the market supply and increased the prices of risky assets—on asset prices,” wrote Daan Struyven, an economist at Goldman Sachs.
Their model suggested the runoff of the Fed’s portfolio could contribute to a roughly 20 basis point jump in the 10-year Treasury yield.