Treasury Yields Climb Higher as Traders Eye the Upcoming Fed Decision

U.S. Treasury yields experienced a rise during Tuesday morning's trading session, with notable gains observed in the 3- and 5-year rates. This surge can be attributed to the market's anticipation of a slightly higher likelihood that the Federal Reserve will maintain elevated interest rates for a longer duration in the coming year.

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Specifically, the yield on the 2-year Treasury inched up to 4.895% from Monday's figure of 4.893%. Meanwhile, the yields on the 3- and 5-year rates recorded significant increases of 7 basis points each, reaching 4.551% and 4.198%, respectively, according to data from FactSet. The yield on the 10-year Treasury also saw a notable advance of 6.1 basis points, reaching 3.916% compared to Monday's 3.855%. Similarly, the yield on the 30-year Treasury climbed 3.6 basis points to 3.953% from Monday's 3.917%.

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The driving force behind these market movements is the market's anticipation of upcoming monetary policy decisions from the central banks of the U.S., eurozone, and Japan. Investors are particularly focused on the U.S. Federal Reserve's actions and have priced in a 98.9% probability of a 25-basis-point increase in the policy interest rate, leading to a range of 5.25%-5.5%, following the conclusion of the Fed's meeting on Wednesday. Furthermore, there are expectations for additional rate hikes of 25 basis points each during either the September or November meetings, with probabilities of 18.7% and 30.5%, respectively.

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Despite the expectation that the Fed will eventually reduce the fed funds rate target to around 5% or lower in the next year, there is a growing likelihood, now at 20.3%, that borrowing costs will still remain at 5.25%-5.5% or 5.5%-5.75%, or possibly even higher, by next May.

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On the economic front, the S&P Case-Shiller home price index showed an increase for May in U.S. economic releases on Tuesday.

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Analysts anticipate that the Federal Reserve will indeed implement a 25-basis-point hike to the fed funds rate target (to 5.25%-5.50%) during its upcoming policy meeting, with limited changes to the Federal Open Market Committee's statement, likely leaving the Fed's forward guidance in a tightening bias and contingent on economic data.

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According to Thierry Wizman, Macquarie's global FX and currencies strategist, the Fed's tightening stance is expected to persist, despite potential minor adjustments, as the central bank relies on economic data to shape its monetary policy going forward.

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