One-and two-year Treasury yields rose substantially Thursday morning, a day after the Federal Reserve pointed to the possibility of a series of interest rate hikes starting in March to combat rising inflationary pressures.
The one-year rate climbed 15 basis points to 0.74% as traders factored in the hikes. Meanwhile, yields on longer-term government debt dropped and the gaps between yields of various maturities narrowed — a sign that investors remain concerned about the economic outlook.
What are yields doing?
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The 2-year Treasury note yield
TMUBMUSD02Y,
1.175%
was at 1.171%, up from 1.089% a day ago. - The 10-year Treasury yields BX:TMUBMUSD10Y 1.796%, down from 1.845% on Wednesday at 3 p.m. Eastern Time.
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The 30-year Treasury bond rate
TMUBMUSD30Y,
2.094%
was at 2.084%, down from 2.166% on Wednesday afternoon.
What’s driving the market?
Yields were mixed Thursday morning as investors continued to digest the Fed’s policy update from the prior session and data releases suggested that the impact of the omicron variant of COVID-19 on the labor market may be fading.
Data released Thursday showed that new applications for U.S. unemployment benefits fell by 30,000 last week to 260,000, signaling that labor-market disruptions tied to omicron are easing up. That’s below the seasonally adjusted 265,000 initial jobless claims forecast by economists polled by The Wall Street Journal.
Meanwhile, a reading of fourth-quarter gross domestic product showed that the U.S. economy sped up toward the end of 2021 before a late omicron surge, expanding at an annual 6.9% pace. U.S. durables-goods orders dropped 0.9% in December, the biggest decline since the 2020 downturn.
A sale of $53 billion in 7-year notes BX:TMUBMUSD07Y at 1 p.m. may be closely watched for its influence on Treasurys.
Wednesday’s policy update from the rate-setting Federal Open Market Committee pointed to the start of a steady increase to interest rates, which could begin as early as mid-March, as the central bank battles pricing pressures.
“This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic,” Powell said at a news conference following Wednesday’s Fed policy meeting.
Policy makers approved a final round of monthly asset purchases, which will bring the stimulus program to a conclusion by March. However, the plan for shrinking the Fed’s nearly $9 trillion asset portfolio, which has more than doubled since March 2020, hasn’t been completed. The central bank, in a policy addendum, did say that in principle it would aim to reduce its asset portfolio once rate increases start.
What strategists are saying
Since Powell’s “hawkish” press conference, “we still believe that U.S. 2yr yields will headed towards 1.5% by mid-March and 10yr yields will rise towards 2.10%,” wrote Tom di Galoma, managing director of Seaport Global Holdings, in a Thursday note. “We still think the front-end is where most of the yield damage will take place in the Treasury market. The Bank of England will raise rates soon too,” he said.
