Bond yields saw minimal movement on Wednesday despite a downgrade to the U.S. government's credit rating by Fitch. Here's a look at the numbers:
2-Year Treasury Yield
The yield on the 2-year Treasury, BX:TMUBMUSD02Y, slipped by 4.6 basis points to 4.871%. Remember, yields move in the opposite direction to prices.
10-Year Treasury Yield
The yield on the 10-year Treasury, BX:TMUBMUSD10Y, retreated 1 basis point to 4.022%.
30-Year Treasury Yield
The yield on the 30-year Treasury, BX:TMUBMUSD30Y, rose 1.6 basis points to 4.111%.
While the credit rating downgrade caused stress in equities and currencies, the Treasury market remained relatively unaffected. Historically, during periods of stress, the U.S. government bond market has actually rallied as investors find it to be a safe haven asset.
Analysts believe that this downgrade by Fitch will result in a more muted market reaction compared to S&P's downgrade in August 2011. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, does not expect any other significant actions regarding the U.S. credit rating in the near-term.
The stability in the Treasury market amidst this news reflects the confidence that investors continue to have in U.S. government bonds.
Market Focus Shifts to Economic Data
Treasury investors are closely watching for indicators of growth, inflation, and other key data dynamics to determine market direction. While the impact of the rating downgrade is expected to be short-lived, it may lead to increased volatility in GSE spreads as government-sponsored enterprise ratings are likely to be lowered accordingly.
Economic Data Releases
The ADP employment report for July, scheduled for release at 8:15 a.m. Eastern, is the primary economic data point on Wednesday. This report, along with the nonfarm payrolls report due on Friday, will play a significant role in the Federal Reserve's decision-making process regarding monetary policy tightening.
According to the CME FedWatch tool, there is an 85% probability that the Fed will maintain interest rates within the current range of 5.25% to 5.50% after its next meeting on September 20.
Furthermore, there is a 29% likelihood of a 25 basis point rate hike to a range of 5.50% to 5.75% during the subsequent meeting in November.
The Fed Funds rate target is not expected to return to around 5% until May 2024, as indicated by the 30-day Fed Funds futures.
Treasury's Refunding Program Announcement
At 8:30 a.m. Eastern, the U.S. Treasury will disclose its refunding program. Thomas Simons at Jefferies predicts that a $99 billion package will be announced, consisting of $41 billion in 3-year notes, $36 billion in 10-year notes, and $22 billion in 30-year bonds.