Bond Report: Two-year Treasury yield rises for second straight week after Fed officials repeat need for more rate hikes

What happened

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.720%
  rose 7.2 basis points to 4.720% from 4.648% on Thursday. It remains at the highest level since March 9, based on 3 p.m. figures from Dow Jones Market Data. For the week, the yield rose 11.6 basis points; it’s advanced 21.9 basis points in the past two weeks, the largest two-week gain since the period that ended May 26.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  3.769%
  was up 4.1 basis points at 3.768% from 3.727% on Thursday. It rose 2.4 basis points for this week and finished higher for the second straight week.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.856%
  rose less than 1 basis point to 3.855% from 3.847% on Thursday. It declined 3.1 basis points this week. 

What drove markets

In remarks on Friday, Richmond Fed President Tom Barkin said strength in consumer spending and the labor market are keeping upward pressure on inflation. Stubborn inflation may require more rate hikes and he would be willing to support further increases in rates, he said. Barkin is not a voting member on the Federal Open Market Committee this year.

Earlier on Friday, Fed Gov. Christopher Waller said fallout from several bank failures earlier this year is likely to continue to play a role in the central bank’s thinking on how much to raise interest rates. Waller was quoted by Bloomberg as saying during a question-and-answer session that “some more tightening” will probably be required to bring down core inflation.

Before Friday, investors appeared doubtful that the Federal Reserve would be able to deliver two more 2023 rate increases, as projected by policy makers on Wednesday.

Sentiment started shifting on Friday. After Barkin’s remarks, traders priced in a slightly higher chance of a quarter-of-a-percentage-point rate hike in September following a similar move in July — which would take the Fed’s main policy rate target to between 5.5%-5.75% three months from now, according to the CME FedWatch Tool.

In U.S. economic data on Friday the University of Michigan’s consumer-sentiment index rose to a four-month high of 63.9 in June from 59.2 a month earlier.

What analysts are saying

“The era of coordinated global policy has more starkly come to end, as displayed this past week, with three major central banks [the Fed, the European Central Bank, and the People’s Bank of China] taking three different stances on interest rates to support their respective economies,” said Stephen Kolano, the Massachusetts-based managing director of investments for Integrated Partners.

“Markets appear to have accepted that policy, in the developed world, will remain restrictive for longer than originally expected given inflation remains well above central bank targets.  The silver lining appears to be that inflation, while still higher than desired, has stopped surprising to the upside,” Kolano wrote in an email.