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Bond Report: Treasury yields climb as Fed’s Bostic joins Bullard in backing late-2022 rate hike plan


Yields for government debt rose slightly across the board Wednesday, a day after Fed Chairman Jerome Powell on Tuesday reiterated that the central bank expects rising inflationary pressures to prove transitory.

Fixed-income markets saw some movement, as another Fed official on Wednesday signaled a willingness to hike benchmark rates as soon as late 2022.

How Treasurys are performing
  • The 10-year Treasury note yield

    was at 1.486%, climbing 1.5 basis points and notching a second straight day of gains.
  • The 30-year Treasury bond rate was at 2.113%, up 0.8 basis point.
  • The 2-year Treasury note was yielding 0.260%, adding 1.1 basis points on the session.

Bond prices and yields move in opposite directions

Fixed-income drivers

Powell on Tuesday attempted to clarify the most recent policy update delivered by the Fed last week, playing down the threat of out-of-control inflation in the recovery phase from COVID.

On Wednesday, Federal Reserve Bank of Atlanta President Raphael Bostic said he pulled forward “my projection for our first move to late 2022,” following a similar comment last week from St. Louis Reserve President James Bullard.

Bostic, who was speaking on a call with reporters, said he saw the economy meeting the Fed’s criteria for “substantial progress” in the economy in three or four months, at which time the central bank could consider tapering its monthly asset purchases and nudging interest rates higher. Bostic is a voting member of the FOMC.

Bostic’s comments came after Powell told a House committee in charge of assessing the central bank’s economic response to the pandemic that inflation is unlikely to hit levels seen in the 1970s, but reiterated that the path forward is fraught for inflation and the labor market.

Fixed-income markets appear to be betting that Powell’s “transitory” view of inflation, one shared by a number of members of the rate-setting Federal Open Market Committee at the Fed, is likely to be correct.

Inflation is viewed as a negative for Treasurys because it can chip away at the fixed, future payments and principal of bonds.

However, investors continue to project that yields will eventually resume a march higher as the economy improves, even if the timing of such a climb commences in earnest isn’t clear. Equity markets are attempting to recover from a rout last week that saw the Dow Jones Industrial Average
the S&P 500 index

and the Nasdaq Composite Index

all end the week lower.

The rate-sensitive Nasdaq Composite notched its 16th closing high Wednesday, perhaps aided by bond yields that have hung lower in the aftermath of last Wednesday’s policy update from Powell, which was taken as more hawkish.

On the economic front, data was mixed with a reading of the U.S. current-account deficit climbing 11.7% to $195.7 billion in the first three months of 2021.

The IHS Markit U.S. flash manufacturing purchasing managers index rose to 62.6 in June from 62.1 in May, while the U.S. flash services PMI fell to 64.8 in June from 70.4 in the prior month. The flash U.S. Composite PMI Output Index posted 63.9 in June, down from 68.7 in May, but nonetheless signaled a historically elevated rate of expansion in output across the private sector.

Also, U.S., new home sales fell 5.9% to a seasonally adjusted annual rate of 769,000 units last month, marking the lowest level since May 2020, the Commerce Department said Wednesday.

On the auction front, $61 billion of 5-year Treasury notes

issued at the highest yield since February of 2020, with the sale happening just after Bostic’s comments.

What strategists are saying?

“Treasuries offered a relatively pedestrian performance on Wednesday; albeit not a leisurely stroll down Bull Street. Yields backed up on the market with the most refining aspect of the moving being the ability of the front-end of the curve to keep pace with the overall weakness,” wrote BMO Capital Markets strategist Ian Lyngen and Ben Jeffery in an emailed note.

“To a large extent, the price action is invariably a function of incorporating the incremental inputs (fundamental, policy, technical, etc.) as investors further refine forward expectations,” BMO wrote.

“What makes this particular episode in US rates so unique is what had been a wide divergence of opinions on how the market would respond to a series of developments just as much as the uncertainty around those same events,” the analysts said.

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