Long-dated U.S. Treasury yields receded Friday, but the short-term 2-year Treasury booked the sharpest weekly rise in nearly 2 years, compressing the yield curve.
Moves on Friday were sparked by comments by St. Louis Federal Reserve President James Bullard but had been at least partly set in motion after the Federal Reserve’s Wednesday meeting concluded with a hawkish tone for financial markets.
How Treasurys are trading
- The 10-year Treasury note yield TMUBMUSD10Y, 1.438% was down 6 basis points 1.449% based on 3 p.m. Eastern Time rates.
- The 30-year Treasury TMUBMUSD30Y, 2.015%, known as the long bond, was at 2.027%, off 7.2 basis points on the day.
- The 2-year Treasury note gained 4.5 basis points to 0.256%.
For the week, the 10-year Treasury lost 1.3 basis points; the 30-year shed 12.4 basis points, for its steepest weekly decline since June 12 of 2020; while the 2-year rose 10.5 basis points for its sharpest yield gain since Oct. 11, 2019, according to Dow Jones Market Data.
Drivers for the Treasury market
In an interview on CNBC on Friday, Bullard said it was “natural” for the Fed to tilt hawkish at its meeting earlier this week given recent strong inflation readings.
He suggested that he would be inclined to see the Fed lift interest rates by late 2022 and said that Fed Chairman Jerome Powell has effectively opened the door to tapering the central bank’s monthly purchases of $120 billion in Treasurys and mortgage-backed securities.
Comments from Bullard, who isn’t currently a member of the rate-setting Federal Open Market Committee, but will be in 2022, coincided with big swings lower in longer-dated Treasury yields.
The Fed official’s comments come days after the FOMC held its policy interest rate steady and made no change to its asset buying program on Wednesday, but also signaled an interest rate rise sooner than expected, with its forecasts suggesting two increases in 2023. And the Fed lifted its inflation forecasts for this year and next.
Analysts said trading in Treasurys were unusual, given the Fed’s expectations for hotter and more persistent inflation, but some said that moves were likely driven by unwinding of bearish short positions and the perception that fixed-income investors were reducing their own expectations for hotter inflation now that the Fed is tilting toward tightening monetary policy.
Yields at the back end of the curve fell sharply on Thursday, with the 10-year Treasury hitting a rate of around 1.444%, according to FactSet data, before recovering somewhat.
What strategists are saying
“We still expect nominal yields to reprice higher at some point this year, once technical factors dissipate and fundamentals reassert themselves,” wrote Jefferies economists Aneta Markowska and Thomas Simons, in a Friday note.
The Jefferies analyst said that there were takeaways from the Fed meeting, which could help see yields head higher and prices falling, eventually:
- Fed tapering
- Markets response to evidence of inflation
- Job demand has become a focal point for the Fed, best assessed by job-opening data.
“In the longer term, we do think the more hawkish sounding Fed does raise plenty of questions about how we are supposed to interpret the new average inflation targeting regime,” the economists wrote.
“Chair Powell highlighted expectations that labor markets would continue to improve and expectations that inflation would trend toward their 2% ‘Goldilocks’ range in the medium term to support the case for beginning taper discussions.”