The long end's initial reaction to the hike was to rally. It did not last, and the curve is now priced for a Fed that keeps going.
The 10-year Treasury yield was quoted at 5.006% late Wednesday afternoon, up about one basis point from Tuesday's 4.996% and sitting at the top of a session range that reached as low as 4.939%.
The intraday path is the story. Yields fell in the minutes immediately following the 2:00 p.m. statement, with the 10-year and 30-year each down four to five basis points and the two-year down roughly one. By mid-afternoon, after the Committee's rate projections and Chair Kevin Warsh's press conference had been absorbed, the entire move had reversed and the 10-year was making session highs.
A long bond that rallies on a rate hike and then sells off on the projections is telling you the market had priced the move but not the path.
The curve was already positioned for more
Tuesday's closing curve showed the two-year note at 4.67%, the five-year at 4.83%, the 10-year at 5.00%, the 20-year at 5.40% and the 30-year at 5.36%.
Set the two-year against the new 3.75% to 4.00% target range. Even after Wednesday's increase, the two-year yield sits roughly 67 to 92 basis points above the range. That does not describe a market expecting a pause. It describes a market that had already concluded the Fed was not finished, a conclusion the Committee's own projections then validated: 16 of the 18 officials submitting forecasts see at least one more increase this year.
Why a 5% 10-year is the number that matters
Thirty-year mortgage pricing, commercial real estate refinancing, corporate issuance and the discount rate applied to long-duration equity cash flows all key off the 10-year, directly or indirectly. The 30-year fixed mortgage rate has climbed back to about 7%.
The equity market showed what that does in real time Wednesday. The Dow Jones Industrial Average fell 1.41%, with financials the heaviest drag: Goldman Sachs fell about $38 a share to $938.43, a decline of roughly 3.9%, American Express fell about $12 to $312.44 and Boeing fell about $8 to $201.58. The Russell 2000, whose constituents carry more floating-rate debt than large-cap peers, was down 0.79%.
Analysts at the Schwab Center for Financial Research framed the consumer side plainly. "If you're a borrower, it's not great," said fixed income strategist Collin Martin, pointing to home equity lines, credit cards and auto loans, and adding of mortgage rates that "the trend has not been good."
What to watch
Thursday brings weekly jobless claims, August housing starts and building permits, and Freddie Mac's weekly mortgage survey, which will show how quickly a 5% 10-year is reaching households. The 30-year's behavior relative to the two-year is the cleaner longer-run signal, on whether the market believes the Fed will succeed in bringing inflation down or simply slow the economy trying.