Treasury yields finished mostly lower on Wednesday as investors assessed remarks made by Federal Reserve Chair Jerome Powell at a gathering of central bankers in Portugal.
What happened
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.716%
declined 4.2 basis points to 4.720% from 4.762% on Tuesday. Wednesday’s level is the lowest in a week, based on 3 p.m. figures from Dow Jones Market Data. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.711%
fell 5.6 basis points to 3.711% from 3.767% Tuesday afternoon. Wednesday’s level is the lowest since June 6. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.809%
dropped 3.6 basis points to 3.803% from 3.839% late Tuesday. Wednesday’s level is the lowest since May 12. - The 10-year and 30-year yields are both down seven of the past 10 trading sessions.
What drove markets
It was a thin day for top-tier U.S. economic data so U.S. traders casted an eye across the Atlantic to Sintra, Portugal, where the European Central Bank held its annual forum on central banking.
Of particular interest was a panel that included Powell alongside the heads of the Bank of England, European Central Bank and Bank of Japan. Investors had been eager to see if Powell would make any reference to the likelihood of additional interest rate rises, given recent upbeat housing, durable-goods and consumer-confidence data in the U.S.
During Wednesday’s panel, Powell said that “although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.” The Fed chair also said he “wouldn’t take moving at consecutive meetings off the table.” He added that a recession is not the most likely case for the U.S., and the economy “has been quite resilient.”
His counterpart at the ECB, Christine Lagarde, reiterated her view that her colleagues are not considering a pause in rate hikes at the moment.
Read: Powell and peers vow to keep fighting inflation until there is evidence they’ve succeeded and Here’s the bit of good news tucked behind a deeply inverted Treasury yield curve
Markets are pricing in an 81.8% probability that the Fed will raise interest rates by 25 basis points to between 5.25%-5.5% on July 26, according to the CME FedWatch Tool. The central bank is not expected to take its fed funds rate target back down to around 5% until next year, according to 30-day Fed Funds futures.
What analysts are saying
“To a large extent, the resilience of the U.S. economy has assisted the Fed in its efforts to re-establish price stability as a solid jobs market, reasonable growth, and rebounding sentiment has extended the [Federal Open Market Committee’s] window of hawkishness through year-end — or at least that is the collective sense at the moment,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.
“On the flipside, certain components of inflation have proven to be stickier than previously assumed, a scenario that would have presented difficult policy tradeoffs had Powell not had the benefit of solid economic footing at this stage in the cycle,” they wrote in a note.
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