US stocks climbed and Treasury bond yields dipped modestly on Tuesday, as traders held off from making significant changes to positions ahead of the Federal Reserve meeting ending on Wednesday.
The US central bank is widely expected to announce it will raise interest rates half a percentage point — the first increase of that size since 2000 — in an effort to combat inflation. US consumer prices rose 8.5 per cent in March, the quickest pace since 1981.
Futures markets are pricing in half-point raises at the subsequent three policy meetings in June, July and September, with the Fed’s key interest rate projected to end the year around 2.9 per cent, from between 0.25 and 0.5 per cent today.
The yield on the two-year Treasury note, which moves with interest rate expectations, was slightly higher, up 0.04 percentage points to 2.77 per cent.
Treasury yields for all other maturities were lower. The yield on the 10-year note, a benchmark for asset pricing and loan rates worldwide, softened to 2.96 per cent — it hit 3 per cent on Monday for the first time since 2018.
On Wall Street, the blue-chip S&P 500 index was up 0.6 per cent and the Nasdaq Composite inched up 0.3 per cent.
Lou Brien, a market strategist at DRW Trading, said: “It has really been very quiet today with people doing some last-minute bookkeeping before the Fed, adjusting positions prior to what they do and say tomorrow. The expectations of a 50-basis point hike has been pretty well baked in at this point.”
The dollar index, which measures the US currency against six others and hit a 20-year high last week, dropped 0.2 per cent.
Treasury yields have been on the move for weeks in anticipation of the Fed’s decision. The two-year in April rose to its highest level since 2018. The rise in the 10-year yield from 2 to 3 per cent was the quickest such increase since late 2010.
Sovereign debt yields climbed in Europe as well. Germany’s 10-year Bund yield, which started the year below zero, exceeded 1 per cent for the first time in seven years in European morning trading before settling back down to 0.96 per cent. The UK equivalent crossed 2 per cent briefly before trimming some of its gains to trade at 1.96 per cent.
The shake-out in bond markets came after the Reserve Bank of Australia raised interest rates for the first time in more than a decade on Tuesday, increasing borrowing costs by a higher than anticipated 0.25 percentage points and citing inflation that had “picked up more quickly, and to a higher level, than was expected”.
The yield on Australia’s 10-year bond hit 3.4 per cent, a level not reached since 2014, while its more policy-sensitive two-year yield rose 0.2 percentage points to 2.73 per cent.
The Bank of England is also expected to raise UK interest rates to their highest level since 2009 on Thursday. BoE governor Andrew Bailey last month said the rate-setting institution was walking a “very, very fine line” between tackling consumer price increases and avoiding recessionary risks from lifting borrowing costs too far.