By Mark DeCambre
Yields on U.S. government debt whipped around Thursday with long-dated Treasurys seeing the biggest slump in weeks, a day after the Federal Reserve was seen adopting a more hawkish stance on monetary policy, signaling that benchmark interest rates could be lifted sooner than expected and that inflation may run hotter than previously forecast.
How Treasurys are performing
The 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +2.90% was yielding 1.509%, compared with 1.569% at 3 p.m. Eastern Time on Wednesday, marking the steepest slide since June 4, according to Dow Jones Market Data.
The 30-year Treasury bond /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +1.63% was at 2.099%, versus 2.211% on Wednesday, notching its biggest retreat since April 15.
The 2-year Treasury note yield /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -3.65% rose further was at 0.211%, versus 0.203% a day ago, after a sharp rise Wednesday.
The belly of the yield curve
The 3-year Treasury note /zigman2/quotes/211347047/realtime BX:TMUBMUSD03Y +1.43% was up slightly at 0.413%, the 5-year Treasury note /zigman2/quotes/211347048/realtime BX:TMUBMUSD05Y +2.69% yield saw its largest decline since June 10 , after a sharp rise Wednesday, and was at 0.941, while the 7-year Treasury /zigman2/quotes/211347050/realtime BX:TMUBMUSD07Y +3.39% saw its largest yield slide since June 9 to 1.397%.
Major fixed-income drivers
Yields at the backend of the curve fell sharply on Thursday, with the 10-year Treasury hitting a rate of 1.44% before recovering somewhat. There weren’t a lot of clear reasons for the moves, but traders and strategists attributed the gyrations partly to short positioning, bets on bonds being unwound and the view that government bond yields may have gotten out of whack with inflation expectations, which were pared on Thursday.
The yield curve, reflecting the difference between long-dated and short-dated debt, also flattened.
Data compiled by TradeWeb shows that the 10-30 year yield spread stands at 58.9 basis points, the flattest since April of 2020. But the spread between the five-year and 30-year closed at 122.1 bps, marking its flattest since late November and the 5-10-year spread stands at 63.0 bps, the flattest since late January.
Yields saw a sharp rise Wednesday when the Federal Open Market Committee held its policy interest rates unchanged at a range between 0% and 0.25% but signaled an interest rate rise sooner than expected .
The Fed’s median projection showed officials expect to raise the benchmark rate to 0.6% from the current range near zero by the end of 2023.
The Fed forecast inflation to rise 3.4% by the end of 2021, up from a March forecast of 2.4%, with some fixed-income analysts and economists worried that the central bank’s current stance risks an overshoot on inflation.
At a news conference on Wednesday to discuss the Fed’s policy, Powell said that inflation is running hotter than expected and also may be more persistent.
As for asset-purchases, the Fed said that it would not taper its $120-billion-a-month pace of bond buying until “substantial further progress” has been achieved in the economy. Powell characterized the June meeting as the “talking about talking about” meeting on asset purchases.
Recent data showing surging prices led many to expect the Fed to at least begin early discussions about reining in some of its ultra-accommodative policy aimed at cushioning the economy from the COVID-19 pandemic, but the central bank’s policy statement was interpreted as more hawkish than some expected.
Some analysts speculate that the Fed could hint at its plans to reduce its bond buying by the time of the Jackson Hole Symposium on Aug. 26-28, then make a more formal announcement in the fall, commencing tapering by the start of 2022.
In economic data Thursday, U.S. initial jobless claims rose 37,000 to 412,000 in the week ended June 12, marking the highest level in a month. Economists surveyed by The Wall Street Journal had forecast new claims to fall to a seasonally adjusted 365,000.
Separately, a reading on manufacturing activity in the Philadelphia area, the Philly Fed manufacturing index, fell slightly in June. The index for current general activity decreased to 30.7 in June from 31.5 in May, broadly matching the 30 consensus forecast from economists’ polled by The Wall Street Journal.
What are strategists saying?
“The theme of a sleepy or errant Fed won’t work for the next several months, so prices have to trade closer to flows and fundamentals. Dollar strength is the big mover on global exchanges this morning, adding to yesterday’s gain,” wrote Jim Vogel, executive v.p. at FHN Financial, in a research note Thursday.
“At its essence, financial markets are recalibrating to the Fed’s updated rate-hike projections and the realization that QE tapering will come into play in Q4/Q1,” wrote Ian Lyngen and Ben Jeffery, strategists at BMO Capital Markets.
“While the punchbowl was eventually going to be removed, the initial stage of the move appears to be appropriately focused on inflation expectations – as evidenced by breakevens as well as commodity prices. Domestic equities, despite initially being under pressure, have managed to remain much closer to the highs than the hawkish overtures from the Fed might have otherwise implied,” they said.