Treasury curve steepens as the Fed holds: 10-year yield closes at 5.05% and stocks edge up

Treasury yields on the longest maturities rose on Wednesday, the day the Federal Reserve left interest rates unchanged, while yields on bills and the 2-year note fell, according to the Treasury Department's daily yield curve. The 10-year yield closed at 5.05%, up from 4.99% on Tuesday, and US stocks finished slightly higher.

What happened

The Federal Open Market Committee kept the target range for the federal funds rate at 3.75%-4.00% in a 10-2 vote. Committee members Lisa D. Cook and Beth M. Hammack voted against, preferring to raise the range by 1/4 percentage point. Our report on the decision has the details.

The Treasury's par yield curve shows the split. The 3-month yield fell 4 basis points to 4.18%, the 1-year yield 3 basis points to 4.47% and the 2-year yield 3 basis points to 4.67% (all computed from the Tuesday and Wednesday values). The 5-year yield rose 3 basis points to 4.85% and the 10-year yield 6 basis points to 5.05%. The 20-year yield rose 7 basis points to 5.41% and the 30-year yield 7 basis points to 5.37% (computed).

Why it matters

When short-term yields fall and long-term yields rise on the same day, the gap between them widens, which is called a steeper yield curve. The gap between the 10-year and 2-year yields was 38 basis points on Wednesday, against 29 basis points on Tuesday, a widening of 9 basis points (computed).

The data do not say why. Daily closing yields combine every piece of news during the session, and the Treasury's table does not separate the Fed's statement from other developments. Our analysis of yields since the Fed's September increase showed that bill yields had been trading above the top of the policy range, which stayed at 4.00% on Wednesday.

Market reaction

The S&P 500 closed at 7,743.98 on Wednesday, up 21.38 points, or 0.3%, from 7,722.60 on Tuesday (computed), according to data from S&P Dow Jones Indices compiled by the St. Louis Fed (FRED). The Dow Jones Industrial Average closed at 52,475.10, up 97.53 points, or 0.2%, from 52,377.57 (computed). FRED had not yet posted a Nasdaq Composite or Cboe Volatility Index (VIX) close for Wednesday when this article was written.

The market's 10-year breakeven inflation rate, the inflation rate implied by the difference between nominal and inflation-protected Treasury yields, was 2.38% on Wednesday, against 2.35% on Tuesday, according to FRED. That is a rise of 0.03 percentage point (computed). The 10-year yield rose by more than that, but FRED had not yet posted the 10-year inflation-protected yield for Wednesday, so the data cannot show how much of the rise came from inflation expectations and how much from the real return.

What to watch

The Bureau of Economic Analysis is scheduled to publish the advance estimate of third-quarter gross domestic product at 8:30 a.m. ET on Thursday, October 29, according to its release schedule.

Treasury yields and stock-index levels are daily closing values and can change quickly. Whether Wednesday's steeper curve persists will be visible in the Treasury's next daily yield curve readings.