The policy-sensitive two-year Treasury yield finished above 5% on Tuesday for the first time since June 2007 after Federal Reserve Chairman Jay Powell left open the possibility that policy makers will reaccelerate the pace of interest-rate hikes.
The 2-year yield’s rise led to its spread with the 10-year rate ending the New York session in triple digits below zero, at minus 103.7 basis points — a level not seen since Sept. 22, 1981, when the spread reached minus 121.4 basis points.
What happened
- The yield on the 2-year Treasury
TMUBMUSD02Y,
4.594%
jumped 11.9 basis points to 5.011% from 4.892% on Monday. Tuesday’s level is the highest for the 2-year yield since June 15, 2007, based on 3 p.m. levels from Dow Jones Market Data. - The yield on the 10-year Treasury
TMUBMUSD10Y,
3.705%
slipped less than 1 basis point to 3.974% from 3.981% Monday afternoon. - The yield on the 30-year Treasury
TMUBMUSD30Y,
3.710%
declined 2.5 basis points to 3.886% from 3.911% late Monday.
What drove markets
In testimony 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 Powell’s written statement, even before he began to speak, led by the 1-year rate
TMUBMUSD01Y,
4.912%.
Meanwhile, the 2-year yield is at its highest level in almost 16 years. Its ascent came after the Fed raised its policy interest rate by 450 basis points since last March to tackle inflation that remains more than three times the central bank’s 2% target.
Markets are now pricing in a 70.5% 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 5.5% and 5.75%, or higher, by November, according to 30-day Fed Funds futures.
Before Tuesday, the MOVE index, a gauge of expected Treasury price volatility, was near its high for the year after having jumped about 30% since the start of February.
Source: Google Finance.
Powell will appear before the House Financial Services Committee on Wednesday.
What analysts are saying
“The strength of the January data seems to have spooked the Fed Chair,” said Michael Feroli of JPMorgan Chase & Co. “Whereas the plan prior to that data round was to hike by 25bps until there was more evidence of disinflation, Chair Powell indicated today that they are prepared to throw out that playbook if the February data don’t reverse some of the January strength.”
The policy-sensitive two-year Treasury yield finished above 5% on Tuesday for the first time since June 2007 after Federal Reserve Chairman Jay Powell left open the possibility that policy makers will reaccelerate the pace of interest-rate hikes.
The 2-year yield’s rise led to its spread with the 10-year rate ending the New York session in triple digits below zero, at minus 103.7 basis points — a level not seen since Sept. 22, 1981, when the spread reached minus 121.4 basis points.
What happened
- The yield on the 2-year Treasury
TMUBMUSD02Y,
4.594%
jumped 11.9 basis points to 5.011% from 4.892% on Monday. Tuesday’s level is the highest for the 2-year yield since June 15, 2007, based on 3 p.m. levels from Dow Jones Market Data. - The yield on the 10-year Treasury
TMUBMUSD10Y,
3.705%
slipped less than 1 basis point to 3.974% from 3.981% Monday afternoon. - The yield on the 30-year Treasury
TMUBMUSD30Y,
3.710%
declined 2.5 basis points to 3.886% from 3.911% late Monday.
What drove markets
In testimony 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 Powell’s written statement, even before he began to speak, led by the 1-year rate
TMUBMUSD01Y,
4.912%.
Meanwhile, the 2-year yield is at its highest level in almost 16 years. Its ascent came after the Fed raised its policy interest rate by 450 basis points since last March to tackle inflation that remains more than three times the central bank’s 2% target.
Markets are now pricing in a 70.5% 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 5.5% and 5.75%, or higher, by November, according to 30-day Fed Funds futures.
Before Tuesday, the MOVE index, a gauge of expected Treasury price volatility, was near its high for the year after having jumped about 30% since the start of February.
Source: Google Finance.
Powell will appear before the House Financial Services Committee on Wednesday.
What analysts are saying
“The strength of the January data seems to have spooked the Fed Chair,” said Michael Feroli of JPMorgan Chase & Co. “Whereas the plan prior to that data round was to hike by 25bps until there was more evidence of disinflation, Chair Powell indicated today that they are prepared to throw out that playbook if the February data don’t reverse some of the January strength.”
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