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Yields on U.S. government debt on Wednesday retreated modestly as investors awaited the first of two days of congressional testimony from Federal Reserve Chairman Jerome Powell, which could offer more clarity on the central bank’s monetary policy plans in the face of surging inflation.
Investors also are watching for a final reading on June producer price inflation.
How Treasurys are performing
-
The 10-year Treasury note
TMUBMUSD10Y,
1.386%
yields 1.393%, compared with 1.415% at 3 p.m. Eastern Time on Tuesday. Yields for debt fall as prices rise. -
The 30-year Treasury bond rate
TMUBMUSD30Y,
2.013%
was at 2.019%, versus 2.037% a day ago. -
The 2-year Treasury note
TMUBMUSD02Y,
0.245%
yields 0.245%, compared with 0.255% on Tuesday.
Fixed-income drivers
Another strong reading of U.S. consumer price inflation on Tuesday has put Powell’s testimony over the next two days in greater focus.
The June CPI reading beat expectations, rising 0.9% after a 0.6% jump in May and the rate of inflation in the 12 months climbed to 5.4% from 5%. The last time prices rose that fast was in 2008, when oil hit a record $150 a barrel.
The Federal Reserve has insisted for months that widespread shortages will fade away once the U.S. and global economies return to normal after the pandemic.
The Fed is holding its policy interest rates in a range between 0% and 0.25% and buying $120 billion of Treasurys and mortgage-backed bonds each month to keep interest rates low.
Minutes of the Fed’s June meeting show that officials had a lengthy discussion about when to slow down, or taper, the asset purchases. That is the likely first step in backing away from its easy money policy stance and investors will be looking for Powell to provide any clues on those plans.
On Tuesday, Federal Reserve Bank of San Francisco President Mary Daly told CNBC that a tapering of bond purchases could begin late this year or early next, and that she’s convinced the recent spate of inflation will prove to be short-lived.
On Tuesday, yields for government debt rose and that move was partly blamed on a 30-year U.S. Treasury auction that went poorly.
Fixed-income investors on Wednesday are also keeping an eye on a Senate Democrat budget agreement, which envisions spending $3.5 trillion over the coming decade, paving the way for their drive to pour federal resources into climate change, healthcare, and family-service programs sought by President Joe Biden.
What strategists and traders say
“Treasury prices firmed overnight as real money accounts bought the dips after yesterday’s softer demand on the bond auction,” wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, in a daily note.
“We think Powell will continue to strike the balance,” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities, in a Wednesday note.
“[Powell] will be walking into a new Democratic led spending plan: $3.5 trillion. A mere, and cool shortfall of $2.5 trillion of what was preferable! The Fed has always wanted more aggressive action on the fiscal side. This one being proposed, however, is fully funded by higher taxes. The Republicans are going to hammer away like ‘no tomorrow’ on inflation, and yes: we expect to hear transitory with the caveat: inflation has been running ‘higher and potentially more persistent than previously thought.’ On employment: still a long way to go,” wrote Faranello.
