US 2-Year Treasury Yield Rises as Markets Place Fed Rate Hike Bets

Talking Points:

• US 2-year Treasury yield rose to a four-year high
• Bond market participants pricing in Fed rate hikes
• FOMC monetary policy decision due on Thursday

The United States two-year Treasury yield rose to a four year high as bond market expectations seem to be leaning towards a future rate hike by the Federal Reserve. The FOMC issues its policy decision on Thursday. The pickup in front-end lending rates may be indicative of market participants readying themselves for the onset of tightening around the corner.

The two-year Treasury bond yield is a potent reflection of monetary policy expectations due to its liquidity and maturity profile. Treasury bills are some of the most-traded assets globally, pointing a broad-based consensus of investors behind price discovery. The two-year maturity fits neatly into the “medium term” time frame that central banks typically target when setting policy parameters.

Looking at the charts below, the US Dollar is seen broadly tracking the trajectory of the two-year yield as tightening bets firm in the years following the 2008-09 global financial crisis. This is not surprising: a comparison of US two-year yields and those of other G10 economies shows the Fed is anticipated to lead its counterparts in tightening monetary policy.