US Treasury Yields Decline as Markets Assess Fed Rate Outlook and December Hike Possibility

Interest rates in the U.S. declined on Thursday morning after the Federal Reserve's decision on Wednesday to leave its key interest rate unchanged. Investors are looking for any indications from the Fed on inflation and whether it'll raise interest rates again in December.

The yield on the 10-year US Treasury note dropped 5 basis points to 4.995% at 6 am ET on Thursday. The 2-year Treasury yield also dropped 5 basis points to 4.683%. The yield on the 30-year Treasury dropped 3 basis points to 5.329%, CNBC reports.

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What does basis point mean?

1 basis point = 0.01 percentage points. Treasury yields and bond prices typically are inversely correlated. That is, bond prices move in the opposite direction to yields. In general, the higher the yield, the lower the price of the bonds.

The Fed leaves the interest rates in the U.S. unchanged.

The Fed on Wednesday decided to leave its key overnight interest rate unchanged in a range of 3.75% to 4%. But the central bank, in its post-meeting statement, indicated inflation was still elevated, suggesting the central bank still had concerns about rising prices.

September's US inflation rate was 3.7% annual. That was above the Federal Reserve's 2 percent long-term inflation goal, CNBC reported. The Fed is watching inflation data to determine how much it needs to do to rein in price increases with its current interest rate policy.

The Fed believes that it requires additional information to address inflation.

The Federal Reserve indicated it would have to wait for more information before making a decision on interest rates. As the Committee gathers more information, it will consider the policy posture needed to help bring the inflation rate back within its 2 percent target range in a timely fashion, the central bank said in Wednesday's statement.

Federal Reserve Chairman Kevin Warsh told reporters following the meeting that there was no predetermined course for interest rates. If the Fed had made a clear determination about monetary policy, he said it would have made such a decision public in a clear way, CNBC reports.

Markets expect Fed rate hike in December

Despite everything, investors continue to anticipate a rate hike at the Fed's December meeting. The CME Group's FedWatch tool is pricing in an 83.6% probability of an 83.6% chance of a quarter-percentage-point (0.25 percentage-point) rate hike in December.

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Soft path for future rate hikes for investors

In markets, there seemed to be an impression that the Fed's latest words indicated a less hawkish interest rate stance instead of a new round of inflation worries, said Ali Hassan, a portfolio manager at Thornburg Investment Management. He made the cutback in the investor's rate hike expectations for the longer-term in a note on Wednesday, CNBC reports.

Markets are still betting a rate hike will happen in December, but not so sure if the Fed will do it again after that, Hassan said. This indicates that investors are seeking to hedge against the prospect of another rate hike, but also against the risk that the central bank might be less hawkish in the future.

Treasury yields wait for new Fed clues Hassan said Friday will be significant as it will mark the end of the time that Fed officials can be prohibited from commenting on the policy meeting. But if policy makers indicate that additional rate increases are likely, chances are that short-term Treasury yields could climb, potentially pulling back some of the gains made over the past few months, he said on CNBC.

Investors will be looking for the Fed to make a decision on future interest rate increases, and will likely be paying close attention to incoming economic data and comments from the Fed officials as they consider that. The big issue in markets is whether the Fed will raise rates in December and if more subsequent increases will come. Inflation is still above the Fed's 2% target.

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