Treasury yields rose early Wednesday as Federal Reserve Chairman Jerome Powell signaled the central bank will raise rates in two weeks and investors continued to monitor Russia’s invasion of Ukraine.
What are yields doing?
-
The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.807%
rose to 1.794%, up from 1.708% at 3 p.m. Eastern Tuesday. Yields and debt prices move opposite each other. -
The 2-year Treasury note yield
TMUBMUSD02Y,
1.484%
bounced to 1.436% compared with 1.303% on Tuesday afternoon. -
The 30-year Treasury bond yield
TMUBMUSD30Y,
2.166%
was at 2.161% compared with 2.104% late Tuesday.
What’s driving the market?
In remarks prepared for delivery to the House Financial Services Committee Wednesday, Fed Chairman Jerome Powell said the central bank intends to raise its policy interest rate following the end of its two-day meeting on March 16, despite uncertainties from the Russian invasion of Ukraine.
The post-invasion Treasury rally, which sent yields down sharply on Monday and Tuesday, took a respite early Wednesday. On Tuesday, the 10-year Treasury yield dipped below 1.70% and saw a combined fall of 27.6 basis points over the first two days of the week — the largest two-day drop since March 23, 2020. The 2-year yield fell a combined 28.1 basis points on Monday and Tuesday, its largest two-day drop since Oct. 2, 2008.
The invasion, and resulting rounds of sanctions against Moscow by the U.S. and Western nations, have fueled a surge in oil and other commodity prices, with the U.S. crude benchmark
CL.1,
topping $111 a barrel earlier Wednesday.
Soaring commodity prices are seen 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.
Rate futures are pricing in a 7.5% chance the Fed would raise interest rates by 50 basis points, or half a percentage point, when policy makers meet later this month. That’s down from 34% a week ago, according to the CME FedWatch tool. The market is now pricing in a 92.5% chance of a quarter-point increase.
In his written remarks, Powell cited inflation well above 2% and a strong labor market as reasons for the move, but didn’t comment on the size of the planned rate hike. He will take questions from lawmakers shortly after 10 a.m. Eastern time Wednesday, then will appear before a Senate committee on Thursday.
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.
The Federal Reserve’s Beige Book report, a compilation of anecdotal observations of economic activity across the central bank’s districts, is due at 2 p.m. Eastern.
What are analysts saying?
“Chair Powell and his team have all but assured that rate hikes will begin next month, while the [European Central Bank] has signaled plans to start tapering bond purchases in March in preparation for rate hikes later. Events related to the invasion of Ukraine may complicate those plans,” said R.J. Gallo, senior portfolio manager and head of the municipal bond investment group at Federated Hermes.
“A 50 basis-point inaugural Fed rate is almost certainly off the table and the terminal rate — the end point for rate-hike cycle — is potentially lower, too,” Gallo wrote in an email.
