By Vivien Lou Chen and Mark DeCambre
The 2-year Treasury yield climbed to another 52-week high on Wednesday, while 10- and 30-year rates hit their highest in over a week, after Federal Reserve Chairman Jerome Powell said the central bank “is of a mind” to raise interest rates in March and may shrink its balance sheet faster than in the previous cycle. In a statement released earlier Wednesday, Fed officials said a rate hike is expected to “soon be appropriate,” while chosing not to accelerate the pace of tapering their asset purchases, which is set to end in March.
What are yields doing?
The 2-year Treasury note /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +1.14% rate rose 6.4 basis points to 1.089% from 1.025% on Tuesday, based on new issuance levels. The yield has been reaching a series of fresh 52-week highs, adding to its ascent toward the highest level since February 2020, based on 3 p.m. levels, according to Dow Jones Market Data.
The 10-year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.36% yield rose 6.1 basis points to 1.845%, up from 1.784% on Tuesday at 3 p.m. Eastern Time.
The 30-year Treasury bond /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +0.04% yield climbed 3.7 basis points to 2.166%, up from 2.129% on Tuesday afternoon.
It was the highest levels for the 10- and 30-year yields since Jan. 18.
What’s driving the market?
Yields turned higher during Powell’s press conference even though the Fed chairman said policy makers haven’t made any decisions on the path of future rate hikes, and that they will make final choices on shrinking the central bank’s almost $9 trillion balance sheet at “upcoming meetings.”Strategists said the lack of specificity around the pace of balance-sheet runoff implies that policy makers are still working out the details.In a statement released before the press conference, Federal Reserve officials held the fed funds rate target between zero and 0.25%, but said they expect “it will soon be appropriate to raise the target range for the federal funds rate,” without committing to a move in mid-March. They also decided to continue reducing the monthly pace of asset purchases, bringing them to an end in early March. The policy-setting Federal Open Market Committee also reaffirmed its “Statement on Longer-Run Goals and Monetary Policy Strategy,” and said it expects that shrinking the central bank’s balance sheet will begin after the process of raising rates has started.
In U.S. economic reports, the U.S. trade deficit in goods topped $1 trillion in 2021 for the first time ever, as Americans snapped up a record amount of imports such as toys, cellphones and appliances. Meanwhile, new-home sales jumped nearly 12% in December to an 811,000 annual rate as supply shrunk, with buyers snatching up whatever inventory they could find.Wednesday’s $26 billion auction of two-year floating-rate notes produced a strong indirect bid, according to Jefferies economists Thomas Simons and Aneta Markowska. Sign up for our Market Watch Newsletters here
What strategists are saying
“As widely expected, the Fed’s updated statement did little more than to prepare markets for a forthcoming rate hike in March, but given that markets have been prepared for such a move for some time, it was little more than a formality,” said Tom Garretson, a senior portfolio strategist for RBC Wealth Management. “Notably, the Fed didn’t see cause to accelerate the pace of its asset purchase tapering timeline, still scheduled to end in early March,” he wrote in an email to MarketWatch.
The FOMC “continued to alert markets that it would begin Quantitative Tightening,” said Northeast Investors Trust Chairman Bruce Monrad. “If Quantitative Tightening will serve as an active tool to tighten financial conditions, that is a notable change compared to the passive approach to balance sheet runoff taken several years ago.”
“The Fed is not willing to commit to a preset path for policy normalization,” as demonstrated by the FOMC statement and Powell’s prepared remarks, said Societe Generale’s Subadra Rajappa, head of U.S. rates strategy. As policy makers gauge the impact of the omicron variant, “they are likely to keep their options open akin to what we saw from the Bank of Canada today. The bond market is reacting by pricing in higher inflation expectations as the Fed is likely to adopt a more data dependent, measured approach to removing accommodation.”