Treasury yields slightly declined Monday, backing further away from the closely watched 3% level as investors looked ahead to the new Federal Reserve boss’s first congressional testimony in hopes for clues on the pace of rate hikes.
What are bonds doing?
The yield on 10-year Treasury notes
was down 0.9 basis points at 2.862%, building on a 4.6 basis-point drop from Friday.
The two-year note yield
slipped 1.2 basis points to 2.230%, while the interest rate on 30-year bonds
was mostly unchanged at 3.158%.
Yields fall as prices rise.
What is driving the market?
Yields initially pulled back in a continuation of the weakness seen late last week after the Fed, in a report to Congress, gave no signs it plans to raise interest rates four times, rather than three times, this year. Analysts said the modest rally was driven by month-end rebalancing where fund managers dipped back into the market to ensure their portfolios matched the average maturity of their benchmark indexes.
But the bond market erased some of those early gains as investors turned their focus on new Fed Chairman Jerome Powell as he headed to Capitol Hill on Tuesday for his first of two rounds of testimony before Congress.
Traders are itchy to know one thing: Is the Fed prepared to raise interest rates four times in 2018 instead of three as the central bank has signaled? At the very least, market participants are eager to learn about Powell and his take on how the recently passed fiscal stimulus could interact with the economic outlook.
Read: Fed and new boss Jerome Powell are on inflation watch as anxious investors look on
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Minutes from the central bank’s January meeting, released last Wednesday, had given the opposite impression and were interpreted as more hawkish, sending the 10-year yield to a four-year high just shy of 3%. That level has historically tended to herald a brewing bear market and some believe hitting 3% would create a near-term tension between the safety of bonds and riskier stocks.
What are strategists saying?
“It’s my view that while [Powell] may be optimistic about the economy, he probably will stick to the current playbook and won’t give any hints that four rate hikes are likely this year instead of the three that the FOMC has already pencilled in,” said Marshall Gittler, chief strategist at ACLS Global, in a note.
“We expect him to be, on the margin, more constructive on the economy in the wake of another fiscal stimulus (i.e., the increased spending caps) and upside surprises in wages and inflation. That said, he will likely strive to sound as balanced as possible, toeing the consensus line of gradual tightening and doing his best to avoid rocking the boat or frontrunning the March FOMC,” said strategists by Credit Suisse led by Praveen Korapaty.
What else is on investors’ radar?
St. Louis Fed President James Bullard said the recent stock-market selloff was “benign” as it was not driven by shifting expectations for U.S. growth. In early February, New York Fed President William Dudley offered up similar comments, sayingthe equities correction was “small potatoes” and would have little influence on the economic outlook.
Bullard also said his biggest concern was that colleagues would become “overzealous” and raise interest rates, hurting U.S. growth.
Randal Quarles, vice chairman for supervision of the Fed, said it was possible for the economy to accelerate without triggering higher inflation, a suggestion the central bank was willing to let the economy gather momentum from fiscal stimulus.