Benchmark Treasury yields ticked higher as the Federal Reserve will end a two-day policy meeting on Thursday that will be followed by an interest rate decision that most are expecting will result in the federal funds rate remaining unchanged.
The Fed hiked rates 25 basis points in September to bring the current rate to 2.25, but while the capital markets forecast a rate change for November is unlikely, they are expecting the central bank’s rate-hiking policy to continue with another 25 basis points in December.
“In terms of the [Federal Open Market Committee] statement, we suspect that it is likely to remain largely unchanged from the September communique,” said Omair Sharif, senior U.S. economist for Société Générale.
Based on the latest CME FedWatch Tool, there’s a 75% chance of a rate hike in December.
As the Democrats gained control of the House of Representatives and the Republicans maintained majority in the Senate, the markets did as expected with no curveballs thrown.
“Markets have more time to digest the U.S. midterm election outcome, but we don’t expect shocking moves. The split U.S. Congress was by and large discounted. The slightly softer U.S. yields and dollar overnight suggest a setback in the reflation trade, but it’s merely splitting hairs,” said analysts at KBC Bank, in a note. “We don’t expect a lasting impact.”
Prior to the election, political analysts were already expecting a split Congress following the results, which would increase political gridlock–general consensus is that this typically benefits the capital markets. However, market analysts predicted that this political divide would do little in terms of impacting the capital markets.
After a volatile October month for both stocks and bonds, U.S. equities were the beneficiaries of the rally as the Dow Jones Industrial Average gained over 500 points at the close of Wednesday’s trading session. On Thursday, market movements were largely muted in anticipation of the Fed rate announcement.
The move higher in Treasury yields could be an indication of a bigger rise, according to Peter Boockvar, chief investment officer at Bleakley Advisory Group.
“I think 3.5 percent to 3.75 percent is easy and unfortunately it would be nice to say that’s because the economy is great and everything is great and nominal GDP is 5 to 6 percent and we’re getting higher interest rates,” Boockvar told CNBC’s “Futures Now” on Tuesday.
Furthermore, Bockvar posits that the lack of interest in U.S. Treasury notes could fuel yields even further.
“We have already a huge amount of Treasury supply that I think is overwhelming buyers, we have Japanese and European investors that are not buying U.S. Treasurys because the cost of hedging out that currency has completely wiped out any spread pickup so it’s not all for good reason that I expect higher interest rates,” Bockvar added.
Related: 3 ETFs to Capture Post-Midterm Election Gain
For more market news, visit ETFTrends.com.