Bond Report: Treasury yields turn mostly lower as investors parse Powell, monitor Russia-Ukraine war

Treasury yields edged mostly lower on Thursday as investors assessed Federal Reserve Chairman Jerome Powell’s testimony to the Senate Banking Committee.

He told lawmakers that the war in Ukraine is likely to boost inflation in the short run, even though it’s unclear how long that pressure will last.

What are yields doing?

The yield on the 10-year Treasury note

was at 1.847%, down from 1.862% at 3 p.m. Eastern on Wednesday. Yields and debt prices move opposite each other.

The 2-year Treasury note yield

stood at 1.516%, little changed from 1.51% on Wednesday afternoon.

The yield on the 30-year Treasury bond

was at 2.224% versus 2.231% in the prior session.

Market drivers

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

On Thursday, Powell reiterated his support for a 25 basis point rate hike at the central bank’s next policy meeting on March 15-16. If inflation doesn’t peak and start to come down, he said the Fed is prepared to raise rates “by more than” a quarter-percentage point, at one or more meetings.

Read: Powell says Ukraine war is adding to upward pressure on inflation

Data released Thursday shows initial jobless claims fell by 18,000 to a two-month low of 215,000 in the last week of February, as businesses hired more people. Economists surveyed by The Wall Street Journal expected claims to fall to 225,000 for the week ended Feb. 26.

The cost of labor rose sharply in the fourth quarter, while overall fourth-quarter productivity rose 6.6%. Factory orders also climbed in January. An ISM barometer of business conditions at service-style companies, such as retailers and restaurants, fell 3.4 points in February to a one-year low of 56.5%. The index has fallen three straight months, though numbers over 55% are viewed as exceptional for the economy.

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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