Since the Fed's September increase, bill yields rose while the 10-year returned to 4.99%

The Federal Reserve kept its target range at 3.75%-4.00% on October 28, six weeks after raising it. Over the same six weeks, yields on Treasury bills rose by 11 to 17 basis points, while the 10-year yield, which closed at 5.00% on September 15, the day before the increase, closed at 4.99% on October 27, according to the Treasury Department's daily yield curve.

What happened

The Federal Open Market Committee raised the target range for the federal funds rate by 1/4 percentage point to 3.75%-4.00% on September 16, in a 12-0 vote, according to the Fed's statement. On October 28 it left the range unchanged in a 10-2 vote, with two members preferring another increase, according to the October statement.

The Fed's effective federal funds rate, the rate banks pay each other for overnight loans, was 3.63% on September 16 and 3.88% on September 17, according to daily data compiled by the St. Louis Fed (FRED). It was still 3.88% on October 26. The overnight rate therefore moved by 25 basis points the day after the decision (computed) and was unchanged on October 26.

On the day of the decision, September 16, stocks fell and short-term yields rose. The Dow Jones Industrial Average closed at 51,461.90, down 1.2% from 52,093.11 the day before (computed). The S&P 500 fell 0.4% to 7,551.81, from 7,585.73 (computed), and the Nasdaq Composite was little changed at 25,978.42, from 25,981.57. The 2-year Treasury yield rose 7 basis points to 4.74% and the 6-month yield rose 5 basis points to 4.22%, while the 10-year yield rose 1 basis point to 5.01% (all computed from the Treasury's daily values). The data do not show how much of those moves followed the Fed's 2:00 p.m. ET statement and how much came from other news that day.

Why it matters

A policy rate set at 3.75%-4.00% anchors the shortest Treasury yields, and the distance between a bill yield and the range shows how much extra return investors were paid to hold the bill. On October 27 the 3-month bill yielded 4.22%, the 6-month bill 4.34% and the 1-year note 4.50%. These are 22, 34 and 50 basis points above the 4.00% top of the range (computed). On September 15, the day before the increase, the same three yields were 4.11%, 4.17% and 4.39%, which were 11, 17 and 39 basis points above 4.00% (computed). The gap has widened at all three maturities.

The sources used here do not say why. A bill yield above the policy range is consistent with several explanations, including bets on further increases, which the minutes of the Fed's September meeting said most participants thought would likely be appropriate by year end. The yields themselves do not distinguish between them.

Short-term yields moved up, long-term yields did not

Yields on Treasuries of different maturities moved by different amounts between September 15 and October 27, according to the Treasury Department's daily curve:

Maturity	September 15	October 27	Change (basis points, computed)
3-month	4.11%	4.22%	+11
6-month	4.17%	4.34%	+17
1-year	4.39%	4.50%	+11
2-year	4.67%	4.70%	+3
5-year	4.83%	4.82%	-1
10-year	5.00%	4.99%	-1
30-year	5.36%	5.30%	-6

Source: US Treasury Department, daily par yield curve rates. Changes computed.

Shorter maturities rose more than longer ones, so the curve flattened: the gap between the 10-year and 2-year yields fell to 29 basis points from 33 (computed). The 10-year yield did not move in a straight line. It rose to 5.31% on October 5, the highest close since September 1, and was 4.96% on October 22, so that its October 27 close of 4.99% is 32 basis points below the peak (computed).

The 10-year yield can be split into a real yield, which is the return after inflation, and a breakeven rate, the inflation rate priced into the bond. FRED data show the 10-year real yield at 2.62% on September 15 and 2.66% on October 26, and the breakeven rate at 2.38% and 2.34% on the same days. The real yield rose a little and the breakeven rate fell a little, so the unchanged nominal yield hides small moves in both parts.

Stocks, credit, the dollar and oil

US stock indexes were higher on October 27 than on September 15. The S&P 500 closed at 7,722.60, up 1.8% from 7,585.73, and the Nasdaq Composite at 26,477.81, up 1.9% from 25,981.57. The Dow closed at 52,377.57, up 0.5% from 52,093.11 (all computed). The Cboe Volatility Index (VIX), which measures expected stock-market swings, closed at 17.52 on October 27 and at 17.20 on September 15.

The path was uneven. The S&P 500 and the Nasdaq reached their highest closes of the period on October 6, at 7,818.93 and 27,599.89. By October 27 they were 1.2% and 4.1% below those closes (computed). Our earlier analysis of the pullback described the Nasdaq's drop and the reasons reported for it.

Credit and the dollar moved against stocks. The option-adjusted spread on high-yield corporate bonds, the extra yield they pay over Treasuries, widened to 3.18 percentage points on October 27 from 2.76 on September 15, an increase of 0.42 percentage point (computed). The Federal Reserve's broad dollar index, which measures the dollar against a basket of trading partners' currencies, rose 2.1% to 121.3202 on October 23, its latest value in the series, from 118.8822 on September 15 (computed).

Crude oil was lower. Brent crude was $123.10 a barrel on October 27, against $130.80 on September 15, a fall of 5.9%. WTI was $103.37, against $107.02, a fall of 3.4% (both computed). Brent had been higher still, at $135.51 on October 2, the highest close since September 1.

What to watch

The Bureau of Economic Analysis is scheduled to publish the advance estimate of third-quarter GDP and the September personal income and outlays report on October 29 at 8:30 a.m. ET, according to its release schedule. The Bureau of Labor Statistics is scheduled to publish October employment data on November 6 and October consumer prices on November 10, both at 8:30 a.m. ET, according to its schedules for employment and consumer prices. The Fed's next meeting is on December 8-9, according to its calendar.

Those releases will show whether the bill-to-range gap persists. If bill yields stay above the top of the range, the data would be consistent with investors holding a view that policy rates may rise further. If they fall back toward the range, the pattern since September would look more like a temporary adjustment. Neither outcome is certain, and the yields on their own do not say which view investors hold.