Markets Digest FOMC Results

Rates mixed in FOMC day hangover. Swap rates and Treasury yields were mixed across a steepening curve today, with the long end of the UST yield curve furthering multi-year highs. The 10-year yield rose 9bps and closed at 4.49%, a staggering contrast to the monthly low of 4.08%. In fact, today’s 10-year TIPS auction drew the highest yield (2.094%) since 2009, a reflection of the rise in real rates compared to somewhat slowing inflation. Meanwhile, the 2-year yield remains at 5.14% after nearly cresting 5.20% in the morning.

BOE pauses hikes on recession fears. In a 5-4 decision, the Bank of England (BOE) decided to hold rates at 5.25%, ending a streak of 14 successive hikes since December 2021. A key driver was economic data that the BOE cited as pointing to an economic slowdown, and observers believe recession risk is increasingly important to policymakers vs. inflation risk. The BOE still left the possibility of further hikes if inflation, which remains at 3x the 2% target, does not subside. Currently, the bank projects inflation to return to target levels by 2Q25. Governor Bailey said, “Inflation has fallen a lot in recent months…but there is no room for complacency.”

BOJ up next. Japan will be in the spotlight overnight and tomorrow, as CPI will be released ahead of the BOJ’s September policy decision. Though core and headline YoY CPI are expected to slow to 3.0%, many expect the BOJ to end its negative interest rate policy at some point in 2024. Governor Ueda stated earlier in the month that Japan could shift away from negative interest rates if there is confident in a sustainable rise in prices and wages, though the shift is unlikely to come tomorrow.