BMO says U.S. Treasury yields may break out ahead of Fed meeting

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Treasury yields ahead of Fed

Highlights

BMO Capital Markets reports the Bollinger Band spread in Treasury yields has narrowed to 24 basis points from 80 since Sept. 28, signaling a potential breakout.
The 2-year Treasury yield closed between 4.70% and 4.82% throughout October, with an average daily trading range of 10 basis points, the highest since March.
BMO expects the Fed to hold rates steady in October but predicts a 25-basis-point hike in December, while warning that a 90% implied probability may be overly confident pending economic data.

Technical signals point to a potential move

As reported by CNBC, citing BMO Capital Markets, BMO Capital Markets said in a report on Wednesday that the Treasury market's consolidation may give way to a more pronounced shift as investors wait for the Fed's next policy decision.

The bank said the spread between the Bollinger Bands, a technical measure of market volatility, has narrowed to 24 basis points from as much as 80 basis points on Sept. 28. BMO strategists wrote that the coiling price action points to the possibility of an impending breakout after an extended period of narrow trading ranges.

The 2-year Treasury yield, which is especially sensitive to expectations for Fed policy, has closed between 4.70% and 4.82% in every trading session since the start of October, according to the note. While that closing range is limited to 12 basis points, the yield has moved across a broader 27-basis-point range during the month, with the average daily trading range reaching 10 basis points, the highest monthly average since March.

Fed outlook and market sensitivity

Treasuries continue to trade in a tight overnight range, extending the recent consolidation pattern as investors also respond to moves in external markets. Beyond Treasury supply, BMO expects U.S. rates to remain sensitive to geopolitical developments and to the performance of risk assets during the corporate earnings season.

Safe-haven demand continues to support Treasuries, helping keep 10-year yields near the lower end of their October range, the bank said. BMO expects the Fed to leave rates unchanged at its October meeting before raising them by 25 basis points in December.

At the same time, the bank said markets may be placing too much confidence in a year-end increase. With a December hike priced at roughly 90%, expectations could still shift if incoming economic data alter the policy outlook.

In our earlier article on U.S. Treasury yields reacting to a hotter-than-expected September CPI print, we explained how investors repositioned as inflation surprises reshaped rate expectations ahead of the Fed’s next decision. We noted that yields still fell as markets weighed the inflation impulse against broader risk concerns and tightening credit conditions, keeping safe-haven demand for government bonds in focus.

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