2024-09-15 21:10:00 +0300

Market Extra: One-year Treasury yield is flirting with magic 4% level as Fed tightens on all cylinders

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MarketWatch
By Vivien Lou Chen

The yield on the 1-year Treasury note is testing 4%, a level that traders say could spill over into other rates and send shivers through financial markets, as the Federal Reserve presses forward in earnest with its campaign to shrink its $8.8 trillion balance sheet.

That balance-sheet process, known as quantitative tightening, is intended to complement the central banks series of aggressive rate hikes, the next one of which is expected to arrive next Wednesday. The Fed is now tightening on all cylinders as the training wheels come off QT following a slow start, according to BofA Securities rates strategist Mark Cabana. And traders say thats one of the reasons behind the one-year yields moves on Thursday, which included briefly touching and going slightly above 4% before retreating again.

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Four percent is a magic number and one that frightens a lot of asset markets, including equity markets, and basically everyone, said head traderJohn Farawellwith Roosevelt & Cross, a bond underwriter in New York. The Feds QT process is one of the reasons this is happening and is adding to pressure on the front end of the curve.

A 4% yield is likely to spill over into other rates in the Treasurys market as expectations solidify around aggressive rate moves from the Fed, Farawell said via phone Thursday. You may see more of the same as what you are seeing now more stress on the equity market and you may see equity people getting out.

Read: Stock-market wild card: What investors need to know as Fed shrinks balance sheet at faster pace

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