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Bond Report: 10-year Treasury yield climbs to highest level since May 2019, a day after Powell’s hawkish interest rate remarks

Treasury yields continued climbing on Tuesday, hitting their highest levels since mid-2019, a day after Federal Reserve Chairman Jerome Powell said policy makers could deliver benchmark interest rate hikes bigger than a quarter percentage point if needed to rein in inflation.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.383%

climbed 6 basis points to 2.375% from 2.315% at 3 p.m. Eastern on Monday. That’s the highest since May 22, 2019, based on 3 p.m. levels, according to Dow Jones Market Data.

The 2-year Treasury yield note
TMUBMUSD02Y,
2.170%

rose 2 basis points to 2.152% from 2.132% on Monday afternoon. It remains at the highest level since May 24, 2019.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.598%

rose 5.7 basis points to 2.592% from 2.535% late Monday. That’s the highest since July 26, 2019.

What’s driving the market?

Treasury yields continued to rise since Monday’s remarks by Powell, who told the National Association for Business Economics that policy makers are prepared to lift rates in increments of larger than 25 basis points at a time in future meetings to rein in inflation. Powell also said the Fed would lift the fed-funds rate above the so-called neutral rate — the level at which it neither speeds nor slows economic growth — if needed.

Fed funds futures show traders pricing in a 64% probability of a 50 basis point rate increase at the next policy meeting in May, according to the CME FedWatch tool. That’s up from 50.5% a week ago. Such a decision would follow the Fed’s March 16 decision to raise its benchmark rate by 25 basis points for the first time since 2018, to combat U.S. inflation at the highest level in 40 years.

The Treasury yield curve is speeding toward inversion at a faster pace than it has in recent decades, with the spread between the 2- and 10-year rates shrinking to as little as 13 basis points on Tuesday before re-steepening. Meanwhile, the spread between 5- and 30-year rates remained near its flattest level since July 2007, according to Tradeweb.

Among Fed speakers on Tuesday, San Francisco Fed President Mary Daly said she backs “marching” interest rates up to a neutral level and maybe higher.

In overseas developments, Russia intensified air and sea attacks across Ukraine.

What are analysts saying?

“As evidenced by the post-Fed flattening, investors were looking for clarity before engaging in a round of dip-buying,” BMO Capital Markets strategists Ian Lyngen and Ben Jeffery wrote in a note. “The great curve compression has ample room to extend during the coming months –– particularly with the geopolitical uncertainties only intensifying at this point.”

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