Bond Report: Treasury yields bounce back as investors assess Powell’s hawkish pivot, omicron variant

What are yields doing?

• The yield on the 10-year Treasury note
  TMUBMUSD10Y,
  1.448%
  rose to 1.457%, up from 1.44% at 3 p.m. Eastern Tuesday. Yields and debt prices move in opposite directions.

• The 2-year Treasury yield
  TMUBMUSD02Y,
  0.586%
  rose to 0.591%, compared with 0.524% Tuesday afternoon.

• The 30-year Treasury bond yield
  TMUBMUSD30Y,
  1.800%
  was at 1.810%, up from 1.784% late Tuesday.

What’s driving the market?

Financial markets have been on a roller-coaster ride in recent sessions as investors attempt to come to grips with the implications of the omicron variant, and the prospect of a faster-than-expected tapering of bond purchases by the Fed.

On Tuesday, Powell surprised market participants by opening the door to speeding the tapering process when policy makers meet later this month. In his second day of testimony before lawmakers on Wednesday, the Fed chairman said that he doesn’t think the central bank’s plan to pull back on, and ultimately end, asset purchases should disrupt financial markets.

Treasury yields rose across the board in New York trading, while U.S. stock benchmarks were climbing at midday, with Dow industrials
DJIA,
+0.66%
clawing back from Tuesday’s rout. Oil prices, which have been hit hard by omicron worries, also rose.

The moves were in contrast to Tuesday’s sharp reaction in markets to Powell’s remarks and renewed omicron worries — in which haven-related buying helped fuel demand for long-term Treasurys, pushing down yields and flattening the yield curve, as stocks and other risky assets tumbled.

Data released Wednesday from the ADP National Employment Report showed that the U.S. economy added 534,000 private-sector jobs in November. It was the third straight month of job gains above 500,000, and above the estimated 506,000 gain that was expected by economists polled by The Wall Street Journal.

Meanwhile, IHS Markit’s final November purchasing managers index reading on manufacturing activity dropped to 58.4 vs an initial 59.1, while Institute for Supply Management data showed a pickup in U.S. manufacturing last month.

The Fed’s Beige Book of economic anecdotes across the central bank’s regions is set for release at 2 p.m.

What are analysts saying?

The problem for the bond market posed by the omicron variant “is to know not only how big this threat is, but whether it is deflationary or inflationary,” said Steve Barrow, head of G-10 strategy at Standard Bank.

“So far bond yields have tumbled and forward inflation measures, like the five-year inflation swap starting in five years have fallen as well,” he wrote. “But most policy makers who have talked about this, like Fed Chair Powell or Catherine Mann from the Bank of England, seem to be skewing the risks towards higher inflation and we think this is correct. So, while there’s no doubt that bonds will rally and yields fall if risk aversion takes an even firmer grip, bond bulls have to remember that the cost of omicron could be higher inflation — and higher yields — over the longer term.”