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March 20, 2021, 10:32 a.m. EDT

The Fed is dovish but bond yields are soaring. What gives?

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By Sunny Oh

Only a day after analysts had hailed the victory of the Federal Reserve over traders doubting the central bank’s pledge to keep monetary policy easy for an extended period, bond yields rose sharply on Thursday.

The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +2.10% was up nearly 10 basis points to around 1.74%, around its highest level since January 2020. Meanwhile, the 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +1.63% was knocking on the door of 2.5%, near its loftiest level since mid-2019. Bond prices move inversely to yields.

See : What we learned — and what we didn’t — from Jerome Powell’s press conference

Investors are now scrambling to understand what has prompted the renewed volatility in a Treasury market that appeared to have calmed down after Wednesday’s Fed meeting.

Here are some of the theories being thrown around:

Average Inflation Targeting

After the meeting, market participants said Powell’s dovish messaging was, in fact, responsible for higher long-term yields.

At the postmeeting news-conference, Powell underlined the central bank would stick to its new framework of average inflation targeting, which would in theory only see the central bank contemplate less accommodative policy if inflation managed a sustained overshoot of 2%.

By confirming the Fed’s willingness to stand pat, even if inflation saw a temporary surge beyond 2%, investors may be raising the probability the economy will run hot in the next few years without having to worry about the central bank pulling away the market’s punchbowl. In that scenario, long-term bond yields would have little protection against the risk of an inflationary surge.

“This new inflation framework is destined for a steeper yield curve,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, in an interview, referring to the spread between short-term and long-term yields.

Yet markets were sending mixed messages. Break-even rates that show inflation expectations among holders of Treasury inflation-protected securities indicated investors did not see price pressures persisting over the longer term.

The 5-year break-even rate was around 30 basis points higher than the 10-year break-even rate.

“The market is pricing in transitory inflation,” said Frank Rybinski, chief macro strategist at Aegon Asset Management, in an interview.


Amid the Treasury-market selloff, the sharpest rises were seen among medium-term maturities like the 5-year note /zigman2/quotes/211347048/realtime BX:TMUBMUSD05Y +2.26% and 7-year note. /zigman2/quotes/211347050/realtime BX:TMUBMUSD07Y +2.44%

As a proxy for interest-rate expectations over the next few years, their surge could also have suggested investors may be doubting the central bank’s pledge to keep policy accommodative for a sustained stretch of time.

After all, analysts remarked there was only so much the central bank could do to fight investors’ tendency to look ahead.

add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
+0.03 +2.10%
Volume: 0.00
Dec. 2, 2021 1:27a
add Add to watchlist BX:TMUBMUSD30Y
BX : Tullett Prebon
+0.03 +1.63%
Volume: 0.00
Dec. 2, 2021 1:28a
add Add to watchlist BX:TMUBMUSD05Y
BX : Tullett Prebon
+0.03 +2.26%
Volume: 0.00
Dec. 2, 2021 1:28a
add Add to watchlist BX:TMUBMUSD07Y
BX : Tullett Prebon
+0.03 +2.44%
Volume: 0.00
Dec. 2, 2021 1:27a
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