US Treasurys have come under persistent selling following Donald Trump’s election victory amid speculation Trump’s protectionist trade policy and plan for massive infrastructure spending will spark the return of inflation in the United States.
Selling over the past six weeks has left longer-dated yields at their highest level in more than two years (yields move in the opposite direction as bond prices). In fact, Morgan Stanley Strategist Matthew Hornback says the current level of 2.50% for the US 10-year yield is “important” and that there are two paths going forward:
- A return back into the 2.00% to 2.20% area (as bonds rally).
- A further sell off that runs the 10-year towards 3.00%
“Forced to choose, we would favour the retracement scenario into year-end, given our view on the December FOMC meeting, investor positioning, and our US economist’s early read insight on the November retail sales report,” Hornback wrote.
Of course the 10-year is testing this key level ahead of the upcoming FOMC interest rate decision, which will be announced on Wednesday. The market is expecting the Fed to raise its benchmark interest rate by a quarter point to a range of 0.50% to 0.75% at the meeting.
World Interest Rate Probability data compiled by Bloomberg shows a 94% likelihood the Fed hikes by a quarter point, and a 6% chance the Fed surprises with a half point move.