MarketWatch photo illustration/iStockphotoFor much of Wednesday, the yield on the one-year Treasury bill was marching closer to 5% and appeared on track to finish the New York session at its highest level in 15 years. Then, Federal Reserve Chairman Jerome Powell stepped in. In an afternoon speech, Powell said the pace of interest-rate increases by Fed officials may slow as soon as their Dec. 13-14 meeting. Those comments took some of the momentum off the 1-year rate BX:TMUBMUSD01Y, which had climbed to almost 4.9% earlier in the day but settled below 4.8% after Powell’s remarks to the Brookings Institution.Read:Powell says pace of interest-rate increases can slow as soon as December meetingTraders’ decision to push the one-year rate closer to 5% hasn’t been a swift or easy one to make, even for fast-moving financial markets that are usually adept at figuring out the central bank’s next steps. On Wednesday, Powell kept alive the idea of the Fed pushing borrowing costs above 5% in 2023, by saying that the likely ultimate level for interest rates will be “somewhat higher” than 4.75% and that history warns against “prematurely loosening policy.” The prospect of a 5% fed-funds rate target has been around since at least September, when Deutsche BankXE:DBK, Wall Street’s most pessimistic bank, flicked at the idea of something close to that level. But until Wednesday, many market players had held back on pricing in such a scenario because of October’s smaller-than-expected rise in inflation, which raised hopes of a less-aggressive policy stance by the Fed.After Powell’s remarks on Wednesday, fed-funds futures traders boosted the likelihood of a half-percentage-point hike by the Fed on Dec. 14 to 77% versus 66% a day ago.They also held on to decent chances of additional rate hikes next year that would push the Fed’s main policy rate target above 5%, up from a current range between 3.75% and 4%. The Fed’s December meeting includes the release of rate projections, which will give financial markets more clues about how much higher interest rates could go. “There was hope from the market that there could be a Fed pivot, but when you look through the [Fed’s November meeting] minutes and what some have said, officials are still going to tighten financial conditions” since inflation hasn’t moved down enough, said Robert Daly, director of fixed income for Glenmede Investment Management in Philadelphia. “There’s a lot of cash on the sidelines so buying yield in fixed income is what investors are doing. Buyers are coming back in the belly and long end as a protection mechanism for their portfolios,” resulting in relatively lower yields on 5-, 7-, 10-, and 30-year maturities, which were all trading below 4% on Wednesday.An almost 5% level on the one-year T-bill yield BX:TMUBMUSD01Y could eventually spill over into other rates, such as the two-year T-bill rate BX:TMUBMUSD02Y, and raise jitters in the broader financial market in much the same way that the market’s move toward a 4% level for rates did. In addition, some analysts said, it’s likely to result in an even more deeply inverted Treasury curve that emits even more worrisome signals about the economic outlook.“You could see the 2-year rate going above 5%” with each leg higher showing up as “nervousness in the markets,” as well as a deeper inversion of the Treasury curve that points to more fear of the U.S. falling into a recession, Daly said via phone. The last time that the one-year T-bill yield climbed to levels comparable to Wednesday’s was on Aug. 8, 2007, when it hit 4.89%, according to FactSet data. In January 2007, the 1-year closed as high as 5.12%. On Wednesday, most Treasury yields finished the New York session lower, with the exceptions of the 3-month, 1-year and 30-year rates.
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