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Bond Report: 10-year Treasury rate jumps back above 1.8%, reversing Tuesday’s steep decline, as Fed’s Powell backs quarter-point rate hike soon

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The 10-year Treasury yield posted its biggest one-day gain in almost two years on Wednesday, effectively reversing Tuesday’s steep decline, after Federal Reserve Chairman Jerome Powell endorsed a quarter-percentage point rate hike on March 16.

Meanwhile, 5-, 10-, and 30-year TIPS rates were all less negative versus Tuesday’s levels, according to Tradeweb data.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.875%

climbed 15.4 basis points to 1.862% from 1.708% at 3 p.m. Eastern Tuesday. That’s the largest one-day gain since March 18, 2020, based on 3 p.m. levels, according to Dow Jones Market Data. Wednesday’s move reversed the 12.8 basis point decline of the prior day. Yields and debt prices move opposite each other.

The 2-year Treasury note yield
TMUBMUSD02Y,
1.512%

rose 20.7 basis points to 1.510%, up from 1.303% on Tuesday afternoon. It was the biggest daily gain since Feb. 10.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.256%

advanced 12.7 basis points to 2.231% versus 2.104% Tuesday afternoon. That’s the largest one-day gain since Jan. 3.

What’s driving the market?

Wednesday’s trading brought a respite to the Treasury rally that sent yields down sharply on Monday and Tuesday, with Powell saying he’s inclined to support an interest-rate increase of 25 basis points in two weeks despite uncertainties from the Russian invasion of Ukraine.

The invasion, along with resulting rounds of sanctions against Moscow by the U.S. and Western nations, has fueled a surge in oil and other commodity prices: The U.S. crude benchmark
CL.1,
+7.73%

topped $112 a barrel on Wednesday.

Soaring commodity prices are seen as adding fuel to inflation already running at a 40-year high, but fears of an economic slowdown are clouding the outlook for Federal Reserve monetary policy.

Read: Intensifying risks to global growth raise possibility Fed, ECB, or both will ease again in 2022, strategist says

Economic data released Wednesday showed that U.S. businesses added 475,000 new jobs in February, according to payroll processor ADP. That’s above the 400,000 increase forecast by economists surveyed by The Wall Street Journal. The report comes ahead of February government jobs data due on Friday, but economists note that the ADP data has often been an unreliable guide to the official jobs reading.

Meanwhile, the Fed’s Beige Book, a compilation of anecdotal observations across the central bank’s districts, revealed that inflation appears to be showing no signs of slowing down.

What are analysts saying?

“It was evident from Powell’s comments that the Fed does not want to be an additional source of volatility and uncertainty amid ongoing geopolitical events, making a more cautious initial step appropriate,” said Deutsche Bank’s Matthew Luzzetti, Brett Ryan and others.

“Given these communications, we have tweaked our Fed profile for this year. We now anticipate that the Fed will raise rates by 25bps in March but have maintained our expectations for 175bps of total tightening this year,” they wrote in a note Wednesday.

Market Snapshot: Dow ends 600 points higher as Powell affirms March rate liftoff, vows to stay nimble as Ukraine crisis unfolds

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