Bond traders came the closest in four years to a 3 percent yield on the 10-year US Department of the Treasury note. Whether it breaches that level might be determined by how new US Federal Reserve Chairman Jerome Powell handles the limelight.
Powell, who took over from Janet Yellen this month, is to speak before the House Financial Services Committee today and the Senate Banking Committee on Thursday, in what is known as the Humphrey-Hawkins testimony.
It will be the first time since Powell was sworn in that bond traders get a chance to parse every word from the new Fed leader, as they did with his predecessors.
A fair amount is scripted — the Fed released its Monetary Policy Report on Friday last week — and as a former member of the central bank’s board of governors, Powell has had years to hone the craft of Fedspeak that has largely kept volatility at bay. He has also long been viewed by some as Yellen 2.0.
TD Securities strategists “expect nothing new,” while the BMO Capital Markets simply said “yawn.”
However, with an economy that the Fed says might already be beyond full employment, inflation showing signs of life and fiscal stimulus on top of that, it might be a struggle for Powell to tamp down the optimism when in the Congressional hot seat.
“He’s going to try to emphasize continuity, gradualism, but I think it’s going to be hard for him not to sound a little bit hawkish, given the backdrop both in terms of inflation and in terms of growth,” BlueBay Asset Management head of credit strategy David Riley said in an interview on Bloomberg Television.
Some strategists are already bracing for a more aggressive Fed and for further bond-market losses ahead, even though the benchmark 10-year treasury yield fell on a weekly basis for the first time all year.
One-time month-end flows and rebalancing might have contributed to the market’s rebound in the latter part of last week, which sent the 10-year yield to 2.87 percent. It on Wednesday last week reached a four-year high of 2.9537 percent after the Fed released minutes of its most recent policy meeting.
Treasury yields so far this year have climbed so quickly that some analysts are already reviewing their projections for the year.
Bank of America Corp last week raised its 10-year US yield forecast for year-end to 3.25 percent from 2.9 percent. Goldman Sachs Group Inc boosted its estimate for the end of this year to the same level.
Goldman Sachs chief economist Jan Hatzius suggested the Fed could pick up the pace of tightening if inflation reaches policymakers’ target and the unemployment rate grinds lower.
Five rate increases this year is a “low probability,” but the bank sees four this year and another four next year. As of now, Fed policymakers only anticipate moving three times this year and two to three times next year.
If Powell hints that he and the Federal Open Market Committee are moving toward a more hawkish path, it would be a “bearish shock” that would roil five-year treasury notes in particular, BMO said.
“He has to be really careful about over-hiking late in the cycle here as the enthusiasm continues to go up,” said Michael Collins, senior investment officer at PGIM Fixed Income, which oversees more than US$700 billion.
Bond traders know Yellen was painstakingly measured in her words. They will soon find out just how much continuity Powell brings in live testimony.
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