Bond yields rose on Wednesday as traders bet that Federal Reserve chairman Jay Powell would maintain his hawkish stance when speaking on Capitol Hill.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
5.040%
rose by 3 basis points to 5.045%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.972%
added 2.2 basis points to 3.991%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.875%
gained 1.9 basis points to 3.893%.
What’s driving markets
Investors are waiting to see what Federal Reserve chairman Jay Powell will say when he’s quizzed Wednesday by the House Financial Services Committee, starting at 10 a.m. Eastern.
Powell’s hawkish comments on Tuesday, when he raised prospects of re-accelerating the pace of interest rate hikes in order to damp inflation that is still running at more than three times the Fed’s 2% target, has rattled bond markets.
The policy-sensitive 2-year Treasury yield is above 5% for the first time in 15 years, while the benchmark 10-year yield is flirting with 4%.
The 10-year versus 3-month yield spread late Tuesday was more than minus 100 basis points, the deepest inversion in four decades, which economists say signals a looming recession.
Source: Bespoke
Markets are pricing in a 72% probability that the Fed will raise interest rates by another 50 basis points to a range of 5.0% to 5.25% after its meeting on March 22nd, according to the CME FedWatch tool.
Before Powell’s comments on Tuesday, the chances of a 50 basis point hike were just under 30%.
The central bank is expected to take its Fed funds rate target to 5.65% by October 2023, according to 30-day Fed Funds futures.
The MOVE index, which measures expectations of Treasury market volatility, is at its highest level in three months, having jumped by roughly a third so far in 2023.
U.S. economic updates set for release on Wednesday include the February ADP employment report at 8:15 a.m., followed by the trade balance for January at 8:30 am. The JOLTS job openings survey is published at 10 a.m. The Fed’s Beige Book of economic anecdotes will be released at 2 p.m. All times Eastern.
What are analysts saying
“Headline from Fed Chair Powell’s testimony –– a 50BP hike next week is on the table. This is tacit admission that the downshift in hikes was a mistake. They slowed thinking they were closing in on the peak rate,” said Stephen Blitz, strategist at TS Lombard in a note.
“They are, in fact, no closer to understanding where the peak rate resides than they were a few months back, because they have no idea where disinflation will settle without a recession. February employment data, released Friday AM, could, however, flip the narrative yet again.”
“In sum, the Fed’s policy tack — get to a peak rate and hold — is an unlikely course given the number of unknowns and high sensitivity to unemployment. They will hike until unemployment rises, followed by a quick succession of rate cuts,” Blitz concluded.
