US 10-year Treasury bond yields dip below 1.30% as Powell says troubled Fed is still seeing inflation fall

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Long-dated US Treasury bond yields fell Thursday as Federal Reserve Chairman Powell said a recent spike of high inflation had made the central bank “uncomfortable” but not discouraged in believing that inflation, although well above the level that is consistent with the central bank’s objectives and an annual rate of 2% would eventually decline.

How Treasurys perform
  • The 10-year government bond is yielding TMUBMUSD10Y 1.301%, 1.297%, down from 1.356% at 3:00 p.m. Eastern Time.

  • The interest rate on the 30-year government bond TMUBMUSD30Y, 1.922%, was 1.920%, compared with 1.989% a day ago.

  • The 2-year government bond TMUBMUSD02Y, 0.229%, returned 0.223%, little changed from Wednesday’s price.

Fixed Income Driver

Powell, while appearing before the Senate Banking Committee, reiterated his message the previous day when he testified before a House panel and told lawmakers that inflation had risen significantly and would likely stay high for a few months before it eased.

However, he admitted that the surge in inflation took policymakers by surprise.

“This is a shock going through the system associated with the reopening of the economy that has driven inflation well above 2%. And of course we’re not comfortable with it, ”Powell told Senate MPs on the second and final day of the biannual congressional hearing.

Government bond buyers shake off inflation fears to buy bonds, with some professionals pointing out sufficient liquidity to support the government bond appetite.

That appetite may be fueled by Powell’s belief, expressed in his testimony to a House panel on Wednesday, that the labor market is “still far away” from where it should be to end monthly purchases of $ 80 billion. Dollars to justify government bonds and $ 40 billion in mortgage-backed securities that had helped prop up financial markets and the economy since the COVID pandemic began last year.

“Conditions in the labor market have continued to improve, but there is still a long way to go,” Powell said Wednesday before a House financial services committee, stressing that he viewed price pressures as a result of short-term factors, including supply-chain shortages , Base effects or comparisons with sharply falling prices in 2020 and a surge in demand in the course of the reopening of the economy.

The 10-year government bonds drifted to a low intraday yield of around 1.293%, and the 2-year and 10-year yield differential or the difference between short-term government bonds and their longer-term counterpart was 1.075 percentage points, according to FactSet.

A flattening yield curve means that borrowers will pay a lower premium for a longer period of time than before, and investors fear that economic growth may peak.

Meanwhile, Chicago Fed President Charles Evans said on a webcast that by the end of the year the central bank would have a clearer idea of ​​the path inflation will take. Like other senior Fed officials, he attributes the recent rise in the cost of living to the reopening of the economy and the resulting shortage of supplies and manpower.

In other economic data, the Philadelphia Fed’s factory index fell from 30.7 in the previous month to 21.9 in June. Regardless, the New York Fed’s Empire State Index rose 25.6 points in July to a record high of 43. According to a survey by the Wall Street Journal, economists had expected a value of 17.3. Any reading above zero for any of the indexes indicates an improvement in conditions.

US industrial production rose 0.4% in June, the Federal Reserve reported Thursday, but a semiconductor shortage contributed to a 6.6% decline in automotive and parts production. Excluding cars, industrial production rose 0.8% for the month.

Outside the US, China’s economic growth slowed to a still strong 7.9% year over year in the three months to June as the recovery from the coronavirus pandemic flattened.

Separately, the U.S. Treasury Department requested extensive position reports from holders of 10-year notes due in November 2030 that exceeded $ 4.1 billion.

What strategists and traders say

“The recent decline in government bond yields reflects an overly pessimistic economic outlook. Strong economic growth, increased inflation, increased global vaccination rates and the less reluctant FOMC should push 10-year returns back to 1.90% in the fourth quarter, “wrote John Canavan, chief analyst at Oxford Economics, in a research note on Thursday .

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