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Bond Report: 10-year Treasury yield holds at 5-month high

U.S. Treasury yields were steady Wednesday, after the 10-year saw levels not seen since mid May on Tuesday, when Federal Reserve Gov. Christopher Waller said the central bank might be compelled to adopt a “more aggressive policy response” if inflation continues to overheat in the wake of the pandemic.

Investors also will be watching for an account of business conditions in the Fed’s 12 districts in the Beige Book, which is due at 2 p.m. Eastern Time.

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What are yields doing?
  • The 10-year Treasury note yields
    TMUBMUSD10Y,
    1.626%

    1.637%, versus 1.634% at 3 p.m. Eastern Time, which represented the highest rate for the benchmark bond since May 19, according to Dow Jones Market Data.
  • The 2-year Treasury note rate
    TMUBMUSD02Y,
    0.387%

    was at 0.387%, down from 0.391%.
  • The 30-year Treasury bond rate
    TMUBMUSD30Y,
    2.081%

    was at 2.095%, up from 2.087% on Tuesday, which represented its highest yield since Oct. 12.
What’s driving the market?

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Investors will be watching for comments from the Fed’s Randal Quarles, who will talk about the economic outlook at the Milken Institute Global conference at 1 p.m. ET. Quarles stepped down from his role as vice chairman for supervision at the central bank last week, but he remains part of the Financial Stability Board until at least December.

Later Wednesday, San Francisco Fed President Mary Daly will be a part of a fireside chat at a symposium of central banking at 8:35 p.m.

On Tuesday, Waller’s comments about the Fed’s potential responses to inflation were read as hawkish, helping to drive already elevated yields up further.

“If monthly prints of inflation continue to run high through the remainder of this year, a more aggressive policy response than just tapering may well be warranted in 2022,” Waller said, in comments made to the Stanford Institute for Economic Policy Research. The Fed governor also said that he thought economic conditions had been met to commence the reduction of monthly purchases of $120 billion in Treasurys and mortgage-backed securities and signaled that he favored starting tapering as soon as November.

A faster pace of tapering suggests to fixed-income investors that the central bank may be inclined to raise interest rates faster than expected to quell intensifying pricing pressures.

Looking ahead, investors will be watching for the outcome of an auction of $24 billion in 20-year Treasurys
TMUBMUSD20Y,
2.061%

at 1 p.m. ET.

What analysts are saying

“The primary theme of the week thus far has been the resteepening of the curve
as a challenge to the aggressive rate hiking schedule priced for 2022 and has led to a bid for the front-end of the curve,” wrote BMO Capital Markets rate strategists Ian Lyngen and Ben Jeffery, in a Wednesday note.

“Wednesday’s session promises more of the same in terms of price discovery in an environment devoid of fundamental inputs. Momentum in the longer end of the curve is flirting with oversold, albeit not to the extremes that would imply an immediate challenge to the selling pressure,” the analysts said.

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