The policy-sensitive two-year Treasury yield jumped closer to 5% on Tuesday after written testimony to Congress from Federal Reserve Chairman Jay Powell left open the possibility that policy makers will reaccelerate the pace of interest rate hikes.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.947% jumped to 4.931% from 4.892% on Monday.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.960% retreated to 3.963% from 3.981% Monday afternoon.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.874% dipped to 3.885% from 3.911% late Monday.
What’s driving markets
In his written opening statement before the Senate Banking Committee, Powell said that January’s stronger-than-expected economic data suggests “that the ultimate level of interest rates is likely to be higher than previously anticipated.” He also said that “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
See: Powell leaves door open for accelerating pace of interest rate rises
Most Treasury yields jumped in response to the statement, even before Powell began to speak, led by the 1-year rate. The chairman will also appear before the House Financial Services Committee on Wednesday.
The two-year U.S. government bond yield now sits just shy of 5%, one of its highest levels in more than a decade, after the Fed raised its policy interest rate by 450 basis points in the last 12 months to tackle inflation that remains more than three times the central bank’s 2% target.
Markets are pricing in a 54.3% probability that the Fed will raise its benchmark rate by 50 basis points to a range of 5% to 5.25% on March 22, according to the CME FedWatch tool.
The central bank is also mostly expected to take its Fed funds rate target to at least 5.5% and 5.75% by November, according to 30-day Fed Funds futures.
The MOVE index, a gauge of expected Treasury price volatility, is near its high for the year after having jumped about 30% since the start of February.
What analysts are saying
“Powell’s prepared text was biased hawkishly (more so than we anticipated) with comments that the Fed is ‘prepared to increase the pace of hikes if needed’ and the ‘ultimate rate peak is likely higher than expected,” said BMO Capital Markets strategist Ian Lyngen. “Since the release of the text, we’ve seen choppy price action but a convincingly bearish skew.”
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