Bond Report: Treasury yields slip from 2019 highs as more Fed officials point to need for a 50 basis point rate hike

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Two-, 10- and 30-year Treasury yields pulled back slightly Wednesday from their highest levels since 2019, as investors digested the Federal Reserve’s policy path and monitored developments in the Russia-Ukraine war.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.360%

was at 2.354%, down from 2.375% at 3 p.m. Eastern on Tuesday.

The 2-year Treasury yield
TMUBMUSD02Y,
2.137%

was at 2.142%, down from 2.152% Tuesday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.583%

was at 2.586%, down from 2.592% late Tuesday.

Based on 3 p.m. levels Tuesday, the 10- and 2-year notes were at their highest since May 2019, while the 30-year was at its highest since July 26, 2019.

What’s driving the market?

This week’s selloff in Treasurys, which drove yields substantially higher, took a pause Wednesday morning as investors await fresh remarks by Federal Reserve officials. San Francisco Fed President Mary Daly and Cleveland Fed President Loretta Mester are scheduled to speak during the day.

Earlier this week, Fed Chairman Jerome Powell said policy makers were prepared to raise benchmark interest rates by more than 25 basis points, or a quarter of a percentage point, in future meetings if needed to rein in inflation. The move came after the Fed delivered a quarter-point hike last week and signaled expectations for a total of 10 to 11 similar-sized moves by the end of 2023.

The Treasury yield curve, a line measuring the differences between yields across maturities, has flattened significantly this month, with investors looking for the 2-year yield to move above the 10-year yield — a phenomenon that has preceded most past recessions.

Read: The yield curve is speeding toward inversion — here’s what investors need to know

On Tuesday, Daly said the Fed needs to steadily raise interest rates up to a neutral level and look at tightening monetary policy more to restrict economic growth so that inflation comes back down. Meanwhile, Mester said said she found it appealing to “front-load some of the needed increases earlier rather than later in the process because it puts policy in a better position to adjust if the economy evolves differently than expected.” Earlier in the day, Powell flagged the risks of new digital financial products.

Meanwhile, investors were also watching the four week war in Ukraine where Russia is increasingly bogged down in a costly and uncertain military campaign, with untold numbers of dead, encircled by western sanctions that are biting hard on its economy and currency. U.S. President Joe Biden was slated to hold summit meetings in Brussels on Thursday with NATO allies, Group of Seven leaders and the European Union that’s likely to produce further sanctions on Moscow.

In U.S. economic data Wednesday, U.S. new-home sales decreased 2% to an annual rate of 772,000 in February.

What are analysts saying?

“A strong economy and unacceptably high inflation are building a consensus to front-load tightening and bring the policy rate to/above the neutral level,” wrote analysts at KBC Bank in Brussels.

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