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Bond Report: Treasury yields rise as Powell affirms half-point hike ‘on the table’

Treasury yields rose Thursday as Federal Reserve Chairman Jerome Powell affirmed that a half-point rate hike is “on the table” in May, while investors snapped up inflation-protected securities in an auction.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.910%

rose 8.1 basis points to 2.917%, its highest finish based on 3 p.m. Eastern levels since Dec. 4, 2018. according to Dow Jones Market Data. Yields and debt prices move opposite each other.

The 2-year Treasury yield
TMUBMUSD02Y,
2.703%

jumped 11.6 basis points to 2.693%, the highest since Dec. 17, 2018.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.932%

was up 5.6 basis points at 2.932%.

What’s driving the market?

Powell, speaking in a panel discussion at an International Monetary Fund event, affirmed that a half-point increase in the fed funds rate was on the table for the next policy meeting in May. Investors have largely penciled in a half-point increase in May, and expectations for more outsize rate rises — as opposed to the typical quarter-point increment — have risen.

Powell was in tune with fellow policy makers who have called for the Fed to move relatively fast, saying it was “appropriate” in his view “to be moving a little more quickly,” and said he thought “there’s something in the idea of front-end loading” as the central bank unwinds loose monetary policy.

“It is appropriate in my view to be moving a little more quickly,” Powell said during the IMF discussion in Washington.

“I also think there’s something in the idea of front-end loading,” when moving away from the central bank’s easy-money policy, he said.

The Treasury Department, meanwhile, saw strong demand at an auction of $20 billion of five-year Treasury inflation protected securities, or TIPS. The auction produced a bid-to-cover ratio of 2.73, the highest since December 2020, according to Thomas Simons, economist at Jefferies, who called the sale “unusually strong” even in the context of recent strong demand for TIPS.

Read: Why inflation ‘mania’ makes the 10-year Treasury note a buy as yield tops 2.8%: B. of A.

What do analysts say?

“Thursday’s session offered nothing if not confirmation of the dominant themes that are at work in the Treasury market,” wrote strategists Ian Lyngen and Ben Jeffery of BMO Capital Markets, in a note.

“Powell confirmed 50 bp (not 75 bp) is on the table for May’s meeting, investors are also fretting over inflation (as evidenced by the record large 5.6 bp stop-through at the 5-year TIPS auction), and while duration might be vulnerable at the moment, it remains poised to continue outperforming the front-end of the curve,” they wrote.

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