Bond Report: Treasury yields trade mixed as investors focus on Powell’s re-confirmation hearing

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Yields for government debt with longer maturities were retreating slightly Tuesday morning, while the 2-year yield continued its ascent, as the re-confirmation hearing of Federal Reserve Chairman Jerome Powell kicked off in Washington.

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What are yields doing?
  • The 10-year Treasury note

    yields 1.767%, down from 1.779% at 3 p.m. Eastern Time, which had left yields at their highest since Jan. 17, 2020. Yields move in the opposite direction to prices.

  • The 2-year Treaury note

    rate was at 0.931%, up from 0.904% on Monday adding to its climb to its highest level since Feb. 27, 2020.

  • The 30-year Treasury bond

    yields 2.083, versus 2.109% a day ago.

What’s driving the market?

Powell appeared before Congress on Tuesday to present a summary of his prepared remarks. In those remarks, Powell indicated that the Fed will take steps to make sure higher inflation seen over the past year doesn’t become entrenched in the economy, emphasizing that the central bank will use all of its tools to root out pricing pressures that arose during the COVID pandemic.

Market expectations for a series of rate increases in 2022 have been growing, with a now more than 70% chance of a 25 basis point hike seen in March, according to the CME FedWatch Tool. Meanwhile, economists at Deutsche Bank and Goldman Sachs Group foresee four hikes this year — more than the Fed has penciled in — and JPMorgan Chase & Co.’s Jamie Dimon told CNBC on Monday to expect even more than that in 2022.

In a virtual speech on Tuesday, Kansas City Fed President Esther George said the central bank should speedily reduce its enormous $8.5 trillion pile of bond holdings to help curb the highest U.S. inflation in almost 40 years and to discourage undue risk-taking. Her colleague, St. Louis Fed President James Bullard, is set to speak later today. Looking ahead, an auction of $52 billion in 3-year notes BX:TMUBMUSD03Y is set for 1 p.m. Eastern Time.

Wednesday’s economic data will include the consumer-price index, which is expected to show a 7.1% headline year-over-year figure for December, which would be the highest level in four decades and has the potential to further solidify the market’s rate-hike expectations. 

On Thursday, Fed Gov. Lael Brainard will testify in front of the same Senate panel as Powell’s, as she aims to succeed Vice Chairman Richard Clarida, who will step down on Friday, two weeks earlier than expected after becoming embroiled in a controversy involving a stock transaction in 2020.

What strategists are saying
  • With fixings traders expecting a headline, year-over-year CPI figure of 7% for December, plus two more readings above that level for January and February, “if we actually see those types of numbers, anyone who is not looking for at least four rate hikes would be adjusting their forecast, and would probably be pushed to look at another four rate hikes in 2023,” said Tom di Galoma, managing director of Treasurys trading at Seaport Global Holdings. “The two-year yield is the most vulnerable part of the bond market, and should be at 1.5% by March of this year, or 2% and 2.5% in early 2023.”

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