Yields jumped on the Fed’s statement with two-year and five-year yields, which are the most sensitive to interest rate changes, leading the move higher.
But sooner-than-expected rate hikes may also dampen inflation pressures, which some market participants fear could run out of control as the economy reopens.
“The market was definitely caught a little bit surprised by two hikes in 2023, and you’re seeing it with the belly leading the way down,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. “Bonds now are a little better bid on the idea that takes away some inflation pressures.”
Long-dated yields also dipped on Thursday after data showed that the number of Americans filing new claims for unemployment benefits increased last week for the first time in more than a month.
Benchmark 10-year yields were last 1.553%, after reaching 1.594% on Wednesday.
Five-year yields were 0.894%, after rising to a two-month high of 0.913% on Wednesday. Two-year yields reached a one-year high of 0.217% on Thursday, and were last 0.201%.
The yield curve between five-year notes and 30-year bonds flattened to 126 basis points, the smallest yield gap since December.
Two-year yields were also pressured higher after the Fed on Wednesday raised the interest rate it pays banks on reserves by five basis points to 0.15%, and the rate it pays on overnight reverse repurchase agreements to 0.05% from zero.
“The relative value of a two-year or three-year note is in part dependent on what a bank can get in overnight rates, which is now somewhat higher,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.
The cost of borrowing in the overnight repo market increased to 5 basis points on Thursday, from one basis point before the Fed move.
Yields on one-month Treasury bills increased to four basis points, from one basis point.
The Treasury will sell $16 billion in five-year Treasury Inflation-Protected Securities (TIPS) on Thursday.
