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Bond Report: Treasury yields rise as Fed’s Powell points to quarter-point rate hike in 2 weeks

Treasury yields rose early Wednesday as investors awaited congressional testimony by Federal Reserve Chairman Jerome Powell and continued to monitor Russia’s invasion of Ukraine.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.760%

rose to 1.765%, up from 1.708% at 3 p.m. Eastern Tuesday. Yields and debt prices move opposite each other.

The 2-year Treasury note yield
TMUBMUSD02Y,
1.388%

bounced to 1.412% compared with 1.303% on Tuesday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.125%

was at 2.138% compared with 2.104% late Tuesday.

What’s driving the market?

The post-invasion Treasury rally took a respite early Wednesday. Treasury prices had been on the rise, dragging yields down sharply, since Russia last week launched its attack on Ukraine, prompting investors to pile into safe-haven assets. The 10-year Treasury yield dipped below 1.70% on Tuesday and saw a fall of 27.6 basis points, based on 3 p.m. levels, over the first two days of the week — the largest two-day drop since March 23, 2020. The 2-year yield fell a combined 28.1 basis points on Monday and Tuesday, its largest two-day drop since Oct. 2, 2008.

The invasion, and resulting rounds of sanctions against Moscow by the U.S. and Western nations, have fueled a surge in oil and other commodity prices, with the U.S. crude benchmark
CL.1,
+6.41%

topping $111 a barrel early Wednesday.

Soaring commodity prices are seen adding fuel to inflation already running at a nearly 40-year high, but have also sparked fears of an economic slowdown, clouding the outlook for Federal Reserve monetary policy.

Rate futures were pricing in a less than 4% chance the Fed would raise interest rates by 50 basis points, or half a percentage point, when policy makers meet later this month. That’s down from 34% a week ago, according to the CME FedWatch tool. The market is now pricing in a 96.3% chance of a quarter-point increase and a 3.7% chance of a half-point rise.

Powell will have the opportunity to provide his assessment of the outlook when he appears before the House Financial Services Committee to testify on monetary policy and the economic outlook. Powell will appear before a Senate committee on Thursday.

The ADP employment report will estimate private-sector jobs activity in February. Economists surveyed by The Wall Street Journal look for an increase of 400,000. The report comes ahead of February government jobs data due on Friday, but economists note that the ADP data has often been an unreliable guide to the official jobs reading.

The Federal Reserve’s Beige Book report, a compilation of anecdotal observations of economic activity across the central bank’s districts, is due at 2 p.m. Eastern. Investors will also hear from Chicago Fed President Charles Evans and St. Louis Fed President James Bullard, who were both scheduled to speak Wednesday.

What are analysts saying?

Powell “will have to acknowledge the additional upward pressure on inflation, as well as the potential impact on growth, but we would be amazed if he were to suggest that this requires the Fed to hike more quickly, given the immensely uncertain environment,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note. “We expect Mr. Powell instead to emphasize the uncertainty, and to state that the Fed will respond flexibly, if required, to changing circumstances.”

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