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Bond Report: Treasury yields edge higher as investors parse Powell, monitor Russia-Ukraine war

Treasury yields turned modestly higher Thursday morning, following an aggressive rise in the prior session after Federal Reserve Chairman Jerome Powell endorsed a quarter-percentage point rate hike on March 16.

Powell will appear before a Senate committee on Thursday, a day after appearing before a House panel and acknowledging the economic uncertainty created by the Russia-Ukraine situation.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.883%

was at 1.881%, up from 1.862% at 3 p.m. Eastern on Wednesday. Yields and debt prices move opposite each other.

The 2-year Treasury note yield
TMUBMUSD02Y,
1.524%

stood at 1.524%, up from 1.51% on Wednesday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.259%

was up at 2.247% versus 2.231% in the prior session.

Market drivers

Russia’s invasion of Ukraine which started last week has generally complicated the outlook for central bank policy. While a surge in oil and other commodity prices as a result of the invasion is seen as further stoking inflation already running at a 40-year high, it will also weigh on growth.

On Wednesday, Powell offered an unusually detailed preview of policy actions the Fed is likely to take at its March 15-16 meeting. He told the House Financial Services Committee that it would likely be appropriate to deliver a rate increase at that gathering and, under questioning, said he would be inclined to support a quarter-point move.

Read: Powell signals 25-basis point rate hike is coming in two weeks—and more tightening after that

Market expectations the Fed would kick off a rate-hike cycle with a half-point increase had risen in response to mounting inflation pressures, but then dissipated in the wake of the Ukraine invasion.

The Fed is expected to continue to raise rates throughout the year. Powell said he wanted to proceed “carefully,” which Fed watchers took as a signal of further quarter-point moves, though Powell left the door open to bigger moves if conditions warrant.

Powell will testify before the Senate Banking Committee at 10 a.m. Eastern.

Initial jobless claims fell by 18,000 to a two-month low of 215,000 in the past week of February, as businesses hired more people. Economists surveyed by The Wall Street Journal had been expecting jobless claims to fall to 225,000 in the week ended Feb. 26.

The cost of labor rose sharply in the fourth quarter, while overall fourth-quarter productivity rose 6.6%.

What are analysts saying?

“Uncertainty related to the war in Ukraine increases downside risks to growth but at the same time, inflation is elevated and with risks to the upside,” wrote analysts at UniCredit, in a note. “This is reflected in lower real yields (the 10-year real U.S. yield has declined over 40 [basis points] since mid February) and higher break-even (BE) inflation (10Y BE has risen by 20 bp since mid-February). In this context, Mr. Powell sent several hawkish remarks during his testimony yesterday, confirming that the U.S. central bank is still set to normalize rates. ”

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