U.S. Treasury yields could be poised for a breakout after weeks of trading within a narrow range, with the Federal Reserve’s upcoming policy meeting potentially being the next major catalyst, BMO Capital Markets said in report on Wednesday. The spread between the Bollinger Bands, a technical indicator used to gauge market volatility, has narrowed to 24 basis points from as much as 80 basis points on Sept. 28, the bank said, adding that the consolidation in the Treasury market could give way to a sharper move as investors await the Fed’s Oct. 28 decision. “To some extent, the coiling price action hints of an impending breakout,” BMO strategists wrote. The yield on the 2-year Treasury which is particularly sensitive to expectations for Fed policy, have closed between 4.70% and 4.82% in every trading session since the start of October, according to the note. While the closing range has been limited to just 12 basis points, yields have fluctuated across a wider 27-basis-point range during the month. The average daily trading range has reached 10 basis points, the highest monthly average since March. Treasuries held within a narrow range overnight as the recent pattern of consolidation persisted, with investors continuing to take cues from external markets. Beyond the impact of Treasury supply, U.S. rates are expected to remain sensitive to geopolitical developments and the performance of risk assets as corporate earnings season unfolds. Safe-haven demand has continued to support Treasuries, keeping 10-year yields near the lower end of their October range, the bank said. BMO expects the Fed to hold rates steady at its October meeting before raising them by 25 basis points in December. However, markets may be placing too much confidence in a year-end rate hike, with the probability of a December increase priced at roughly 90%, leaving room for expectations to shift as fresh economic data emerge.
