By Sunny Oh
Treasury yields rose on Tuesday, a reversal from the sharp decline in previous sessions, as investors digested remarks by Federal Reserve Chairman Jerome Powell and other central bankers.
What are Treasurys doing?
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -3.54% rose 3.4 basis points to 2.119%, off its lowest finish since September 2017. The two-year note yield /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -4.31% was up 2.4 basis points to 1.872%, bouncing from a multiyear low of 1.848% on Monday.
The 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -3.13% climbed 5.2 basis points to 2.602%, marking its biggest daily rise since April 1. Bond prices move in the opposite direction of yields.
What’s driving Treasurys?
Investors attained some clues on the direction of interest-rate policy from the Fed on Tuesday. Echoing St. Louis Fed President James Bullard on Monday, Powell indicated trade tensions could lead the central bank to cut interest rates, saying that the Fed would “act as appropriate” to lengthen the U.S.’s economic expansion. Fed Vice Chair Richard Clarida also said in a CNBC interview that the Trump administration’s tariffs could influence monetary policy.
Yet other officials appeared more steadfast in their support for the Fed’s patient stance. Chicago Fed President Charles Evans said he was comfortable with current monetary policy, though he said the uncertain outlook for the economy warranted close attention. He also said investors who expected several rate cuts this year were seeing “something that I haven’t yet see in the national data.”
Traders and bond investors are increasingly convinced of the necessity for several rate cuts this year to prevent an economic slowdown as the U.S.’s tariff disputes with China and other trading partners threaten to weigh on the global economy’s health.
Investor sentiment for risk assets strengthened on Tuesday after Powell’s remarks was seen as opening door to easier monetary policy. The stock-market’s gains on Tuesday helped ease appetite for government paper, pushing yields higher. The S&P 500 /zigman2/quotes/210599714/realtime SPX -1.17% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.15% were both up more than 1%.
What did market participants say?
“Powell’s assurance the Fed will ‘act as appropriate to sustain the expansion’ was confirmation that not only is a rate cut on the table, but it is nearing on the horizon. Risk assets improved in the wake of the dovish undertones,” wrote Jon Hill, an interest-rate strategist at BMO Capital Markets.
“The increase in Treasury yields on Tuesday is more reflective of how far ahead of the Fedspeak pricing had gotten, exacerbated by a solid rally in equities. This created a bit of a buy-the-rumor, sell-the-fact dynamic in the rates market that also opens the possibility of taking advantage of any overdone selling pressure to get invested at higher yields,” said Hill.
What else is on investors’ radar?
The Reserve Bank of Australia cut its benchmark interest rate by 25 basis points to 1.25% on Tuesday, its first rate cut in around three years. The 10-year Australian government bond /zigman2/quotes/211347066/realtime BX:TMBMKAU-10Y -0.09% traded at 1.53% on Tuesday, more than a percentage point lower than its November high of 2.78%.
RBA Governor Philip Lowe said the move would boost inflation and reduce unemployment. Australia’s GDP grew just 0.2% in the last quarter of 2018 and its annual growth rate has slowed to 1.7%.