Treasurys sold off sharply Monday, pushing the yield on the 10-year Treasury note decisively above the 2.30% threshold as Federal Reserve Chairman Jerome Powell warned that policy makers were willing to boost rates in half-point increments if needed to get inflation under control.
What are yields doing?
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The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.318%
was at 2.315% at 3 p.m. Eastern, its highest since May 24, 2019 and up 16.9 basis points from 2.146% at the same time on Friday. Based on 3 p.m. levels, Monday’s yield rise was the largest for the 10-year since March 18, 2020, according to Dow Jones Market Data. -
The 2-year Treasury note yield
TMUBMUSD02Y,
2.166%
jumped to 2.132%, also the highest since May 24, 2019. That compared with 1.955% Friday afternoon. -
The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.547%
rose to 2.535% versus 2.417% late Friday, its highest since July 30, 2019.
What’s driving the market?
“If we conclude that it is appropriate to move more aggressively by raising the federal-funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said in remarks to the National Association for Business Economics.
The Fed chief emphasized the need to tighten monetary policy quickly, warning that upward pressure on prices from the invasion of Ukraine comes at a time of “already too high inflation.”
Powell said the Fed was willing to raise the fed-funds rate above what’s known as the neutral rate if necessary. The neutral rate is the level at which policy makers estimate policy neither slows nor speeds growth. Fed officials largely see the neutral rate, assuming 2% inflation, sits around 2.5%, according to The Wall Street Journal.
Major central banks, including the Fed, have signaled more concern over the ability of Russia’s war on Ukraine to stoke already strong inflation via surging prices for oil and other commodities.
On Monday, the Ukrainian government refused demands by Russia to surrender the southern port city of Mariupol as Russian forces continued to bombard Ukrainian cities. The demand by Russia came hours after Ukrainian authorities said Moscow’s forces had bombed an art school that was sheltering about 400 people.
Stiff resistance has prevented Russian forces from making a quick takeover of the country. The Wall Street Journal reported that senior U.S. officials see signs Russia is adjusting its strategy to secure territorial objectives and use leverage to pressure Kyiv to accept neutrality between Moscow and the West.
What are analysts saying?
“Chatter about the potential for a 50 [basis point] hike at some stage will only further contribute to the market’s tendency to err on the side of pricing in a more hawkish outcome than what is ultimately realized,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a note.
The message from Powell that 50 basis points at some meeting is on the table and that the Fed could hike beyond the neutral rate “isn’t new per se; however, Powell decided to reiterate the message even in the context of last week’s selloff in Treasuries and repricing to a steeper trajectory of rate normalization,” he wrote.
