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Bond Report: Treasury yields climb as Fed minutes imply officials are thinking about thinking about tapering

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Long-dated U.S. government bond yields were heading higher Wednesday afternoon, after minutes from the Federal Reserve suggested that some central bankers were beginning to consider a path to dial back easy-money policies at some point, even as the report described supply-chain bottlenecks forming in the economy as “transitory effects” of a business cycle rebounding from the worst pandemic in generations.

So-called tapering of the Fed’s $120 billion a month asset-purchase program is seen as a de facto form of tightening in financial markets.

How are Treasurys performing?
  • The 10-year Treasury yield
    TMUBMUSD10Y,
    1.675%

    was at 1.690%, up 4.9 basis points from Tuesday’s 3 p.m. Eastern Time levels.
  • The 30-year Treasury
    TMUBMUSD30Y,
    2.379%

    was yielding 2.389%, up 3.8 basis points.
  • The 2-year Treasury note rate
    TMUBMUSD02Y,
    0.153%

    was at 0.153%, up 0.2 basis point.

Bond prices fall as yields rise, and vice versa.

What’s driving fixed-income trading?

Minutes from the Fed’s April 27-28 meeting, showed that some officials pointed to the possibility of discussing tapering of its asset-purchase program at subsequent meetings, if the economy continues to show evidence of improvement and rising price pressures.

The account of the Fed’s meeting also noted that members of the rate-setting Federal Open Market Committee viewed price pressures building from supply-chain bottlenecks as “transitory effects” of the economic rebound.

Before the minutes, Atlanta Fed President Raphael Bostic and St. Louis Fed President James Bullard at separate events said that the Fed wanted to be nimble as it managed the unprecedented rebound from the COVID pandemic.

Bostic, speaking at a local event hosted by his Federal Reserve, said that he remains open to “every scenario,” as it relates the outlook for the economy in the recovery phase from COVID, while Bullard said he wanted to wait to talk about reducing accommodation until it was clearer the pandemic was over.

“You don’t want to start down a path of changing policy and then have to go back into emergency mode because the pandemic has gone in some direction you didn’t anticipate,” Bullard said, in comments to reporters after a talk to the Official Monetary and Financial Institutions Forum, a London-based think tank.

The Fed minutes come amid a downturn in stocks and bond prices on Wednesday that has been largely pegged to inflation fears.

Worries about pricing pressures are taking center stage because investors aren’t certain that they will prove as transitory as the U.S. central bank anticipates.

A key reading of consumer inflation for April rose at the fastest pace in nearly 13 years, signaling greater stress on the economy as businesses grappled with supply shortages that are raising the cost of many goods and services.

Meanwhile, U.S. stocks were trading lower Wednesday, with the Dow Jones Industrial Average
DJIA,
-0.77%

down 1.1% after the release of minutes.

Meanwhile, investors a $27 billion auction of 20-year bonds
TMUBMUSD20Y,
2.294%

at 1 p.m. as lackluster, according to sources. The 20-year saw a tail of 0.8 basis point. The tail is the gap between the highest yield the Treasury sold in the auction and the yield before the auction began. 

What are fixed-income strategists saying?

“All it took was one sentence,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, referring to the Fed’s minutes and this line in particular:

“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

“I didn’t plan on writing about the FOMC minutes from the meeting three weeks ago because we’ve already heard from so many committee members over this time frame that it was unlikely anything new would be revealed,” Boockvar wrote.

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