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Bond Report: 10-year Treasury yield holds around 1.56% after hawkish Fed meeting

Yields on U.S. government debt slipped Thursday morning, after a sharp rise Wednesday when the Federal Reserve adopted a more hawkish stance on monetary policy, signaling that benchmark rates could be lifted sooner than later and that inflation may run hotter than had been previously anticipated.

How Treasurys are performing
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.555%

    was yielding 1.568%, compared with 1.569% at 3 p.m. Eastern Time, bringing benchmark yields to their highest level since June 7.
  • The 30-year Treasury bond
    TMUBMUSD30Y,
    2.157%

    was at 2.175%, versus 2.211% on Wednesday.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.205%

    was at 0.201%, versus 0.203% a day ago.

The 2-year yield hit its highest level in a year on Wednesday and is holding around that level on Thursday, while the 10 and 30-year rose to their highest since June 7.

The belly of the yield curve

The 3-year Treasury note
TMUBMUSD03Y,
0.407%

was trading at 0.410%, compared with 0.413% on Wednesday, the 5-year Treasury note
TMUBMUSD05Y,
0.897%

yield was at 0.902%, from 0.879% a day ago, while the 7-year Treasury
TMUBMUSD07Y,
1.291%

was at 1.305%, versus 1.285%.

Major fixed-income drivers

Yields slipped slightly early Thursday, after a sharp rise Wednesday when the Federal Open Market Committee held its policy interest rates 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 will rise 3.4% by the end of 2021, up from a March forecast of 2.4%, with some fixed-income strategists and economists worried that the central bank’s current stance risks and overshoot on inflation.

At a news conference on Wednesday to discuss the Fed’s policy, Powell said that inflation is run hotter than expected and 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 said characterized the June meeting as the “talking about talking about” meeting on asset purchases.

Recent data showing surging prices had led many to believe the Fed would 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 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, and commence tapering by the start of 2021.

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.  

“The brunt of the price action occurred in the 5-year yesterday. Makes sense, but even still we are 10-basis points from the high in yields seen earlier this year. With the 10-year, we’ve supported a 1.48-1.68% range and for now, it’s back to the data with jobless claims at 8:30 a.m. this morning,” writes Greg Faranello, head of U.S. rates at AmeriVet Securities. 

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