Treasury yields fall as Powell says inflation will dwindle


Yields on U.S. government debt fell on Wednesday as investors digested 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 digested a reading of the June producer-price index, which jumped 1% last month, the government said Wednesday.

How Treasurys are performing
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.368%

    yields 1.364%, 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,
    2.005%

    was at 2.001%, versus 2.037% a day ago.

  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.241%

    yields 0.241%, compared with 0.255% on Tuesday.

Fixed-income drivers

Data on Tuesday showed U.S. consumer price inflation rising further, putting Powell’s testimony over the next two days in greater focus.

However, the Fed chairman, in prepared remarks, said that the sharp rise in inflation seen so far this year will dwindle away.

Powell’s comments came as a reading of the producer price index on Wednesday, jumped 1% last month, far exceeding estimates by economists polled by The Wall Street Journal who forecast a 0.6% increase.

The pace of wholesale inflation over the past 12 months rose to 7.3% from 6.6% in May. That is the highest level since the index was overhauled in 2010, and likely one of the highest readings since the early 1980s.

The Fed has insisted for months that price rises caused by widespread shortages will ease once the U.S. and global economies return to normal after the pandemic. Powell reiterated that stance in his comments ahead of his testimony in front of the House Financial Services Committee at 12 p.m. Eastern Time.

“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Powell said.

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.

His prepared remarks suggest that the central bank is in no rush to remove monetary accommodation but he noted that discussions among Fed members are under way.

“While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue,” Powell said. “We will continue these discussions in coming meetings,” Powell will tell the House panel.

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.

“The big question is whether the price pressures seen this year are transitory, as central bankers around the world say they are,” wrote James Solloway, chief market strategist and senior portfolio manager at SEI, which manages some $ 1 trillion, in emailed comments.

“In the latest economic projections from the U.S. Fed, the Federal Open Market Committee (FOMC) sharply raised its median forecast for its preferred measure of inflation (the personal-consumption expenditures (PCE) price index, excluding food and energy) to 3.0% from 2.2% just three months ago. Yet the FOMC’s inflation forecasts for 2022 and 2023 barely changed from the median reading for both at 2.1%,” he wrote.

“Investors in the bond market appear to agree with the Fed’s point of view. Although U.S. bond yields rose sharply in the first quarter, they have fallen over the past three. The 10-year benchmark bond currently trades below 1.50%, a noticeable decline of almost 0.25% since the end of March. There’s no telling how long bond investors will maintain such a calm perspective if prices keep rising at a pace that has not been seen in almost 30 years,” he wrote.



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