Bond yields higher as another rate hike signaled

Yields on U.S. Treasuries climbed while stocks slipped as traders digested commentary from Federal Reserve officials’ last meeting.

The S&P 500 closed down 0.2% following the release of the minutes of the Fed’s June meeting, which indicated hawkish leanings from some voting members. In late trading, Spirit Airlines advanced 2.6% after JetBlue Airways said it was scrapping plans for an alliance with American Airlines Group to focus instead on its pending merger with Spirit. JetBlue shares slid 1.5%.

The yield on policy-sensitive two-year Treasuries inched up to 4.94%, while the 10-year rose to 3.93%. That inverted yield curve is often read as a sign of a coming economic slump. The Fed’s June gathering threw Wall Street for a loop as officials paused their rate-hiking cycle after 10 consecutive increases. The central bank has forecast two more rate increases this year, which could further weigh on economic growth and corporate profits. The next rate decision is due in three weeks.

“I am the most bearish I have ever been on the economy without being in a recession, and it’s because of the yield curve, the contraction of money and QT at the same time they are hiking rates,” Ed Hyman, founder and chairman of Evercore ISI, said on Bloomberg Television.

Yet, many parts of the equity market have largely shrugged off the threat of higher interest rates, with the Nasdaq 100 ending the day little changed, bolstered by gains in mega-cap stocks including Meta Platforms and Alphabet.

“Either the market does not believe the Fed’s going to raise a lot more, or the market is very disconnected from reality. Because if the Fed raises, let’s say another 50 basis points, then the probability of a recession increases pretty substantially. And these multiples become more difficult to justify,” said Chetan Jindal, chief investment officer of Greenwich Ivy Capital.

Swaps traders have not fully factored in two more quarter-point hikes, though bets on the Fed easing up on its tightening policy have been pushed further down the road.

Wednesday’s minutes showed division among members of the Federal Open Market Committee where – despite the unanimous decision to pause – some would have preferred another hike in June amid a tight labor market.

“This adds to the high probability the Fed hikes again on July 26,” wrote Ian Lyngen, a strategist with BMO Capital Markets. “The FOMC minutes deliberately left investors with the impression that June’s pause was a close call and that a July hike is the committee’s base case scenario.”

Investors will be closely watching Friday’s June employment report will for signs of a cooling labor market. Lyngen expects the upcoming data to fuel debate over whether the Fed will hike or pause in September.

A gauge of the dollar rose against all of its Group-of-10 peers while gold slid. Crude touched $72 a barrel after Saudi Arabian and Russian output cuts earlier this week.