Treasury Yields Top 1.75% After Powell Spurs Bets on Inflation

ING sees ‘no real barrier’ for move higher in 10-year yield U.S. 10-year rate climbs to highest level since January 2020

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Treasury yields breached more key levels as bond traders boosted bets that the Federal Reserve will allow inflation to overshoot as the U.S. economy recovers.

Yields on the benchmark 10-year note climbed as much as 11 basis points to 1.75% — the highest since January 2020, while the 30-year breached 2.5% for the first time since August 2019. Market measures of inflation expectations are now trading near multi-year highs, with traders paring back bets the Fed would start tightening as soon as late next year. The dollar rebounded against its major peers.

The moves came after Fed Chair Jerome Powell indicated he wasn’t concerned over the recent surge in long-term yields — with his focus still on whether financial conditions remained accommodative. Rates have surged this year on expectations that stimulus spending and vaccine rollouts will fuel a sharper economic recovery and a pick up in inflation.

“Powell has given the green light to higher 10- and 30-year yields as progress out of the pandemic accelerates,” said BMO Capital Markets’ Ian Lyngen. “Underlying inflation expectations remain elevated and will remain a bedrock of the bearish trend in Treasuries until those assumptions are challenged. For now, it doesn’t pay to fight the cheaper and steeper yield curve.”

Treasury 10-year yield rises above 1.7% for first time since Jan. 2020

Futures volumes surged after the benchmark 10-year yield broke past 1.7%, giving way to another bout of selling. Treasuries were already facing modest pressure in Asian hours before flows accelerated at the start of the London session and yields climbed to fresh highs in New York morning trading. Long positions amassed ahead of the Fed meeting were unwound, adding to the selloff.

Treasury 10-year yields are likely to hit 2% as traders are “coming to the view that stronger U.S. growth, and a Fed more tolerant of higher inflation, mean there is further upside for bond yields,” said Khoon Goh, strategist at Australia & New Zealand Banking Group Ltd.

“The overall tone from the Fed leaves the back end of the curve largely unprotected,” wrote ING Groep NV strategists led by Padhraic Garvey. There is “no real barrier to a test higher in the 10-year yield in the coming weeks.”

The reaction was more muted in European rates markets, with the European Central Bank striking a more concerned tone than the Fed on rising yields. That helped briefly push the spread between benchmark U.S. Treasuries and German bunds above 200 basis points for the first time in over a year. The comparable gap in real yields has also widened to its largest since March 2020.

Spread between Treasuries and bunds surpasses 200 basis points

While many including BlackRock Inc. say expectations for sustained inflation gains are misplaced, others see the risk of a substantial overshoot as being real. Deutsche Bank AG strategists see the U.S. 10-year yield rising to as much as 3% if price increases materialize sooner than expected.

“The Fed’s steady as she goes approach may clarify the fact that it intends to be reactive than pre-emptive but this does not address the uncertainty regarding the outlook for inflation,” said Richard McGuire, the head of rates strategy at Rabobank. “Investors cannot rely upon the bank getting ahead of the curve should that prove necessary.”

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Stuart Turley is President and CEO of Sandstone Group, a top energy data, and finance consultancy working with companies all throughout the energy value chain. Sandstone helps both small and large-cap energy companies to develop customized applications and manage data workflows/integration throughout the entire business. With experience implementing enterprise networks, supercomputers, and cellular tower solutions, Sandstone has become a trusted source and advisor.   He is also the Executive Publisher of www.energynewsbeat.com, the best source for 24/7 energy news coverage, and is the Co-Host of the energy news video and Podcast Energy News Beat. Energy should be used to elevate humanity out of poverty. Let's use all forms of energy with the least impact on the environment while being sustainable without printing money. Stu is also a co-host on the 3 Podcasters Walk into A Bar podcast with David Blackmon, and Rey Trevino. Stuart is guided by over 30 years of business management experience, having successfully built and help sell multiple small and medium businesses while consulting for numerous Fortune 500 companies. He holds a B.A in Business Administration from Oklahoma State and an MBA from Oklahoma City University.