U.S. Treasury yields pulled back across the board on Wednesday after a report from the Federal Reserve indicated that economic growth in the U.S. slowed to a moderate pace in early July through August.
Meanwhile, an auction of 10-year notes was viewed as average and didn’t appear to saw trading in benchmark Treasurys.
What yields are doing
The 10-year Treasury note yields
1.333%, versus 1.370% at 3 p.m. Eastern Time on Tuesday. Yields for bonds move opposite to prices.
The 30-year Treasury bond rate
was at 1.952%, compared with 1.985% Tuesday afternoon.
The yield on the 2-year Treasury note
was at 0.218%, after yielding 0.220% a day ago.
What’s driving the market?
The Beige Book was seen by some strategists as lackluster. Several economists also suggested that the narrative from the anecdotal account of business conditions from the Fed’s 12 business districts wouldn’t meet the criteria of “substantial further progress,” that the central bank says it needs to see before considering removing easy-money policies and eventually raising interest rates.
The Fed survey also indicated that businesses weren’t encountering difficulty in raising prices to account for higher costs they were incurring due to supply chain disruptions. And some business contacts suggested that Americans could see “significant hikes” in prices in the coming months.
Many Fed officials consistently have said they expect supply-chain related inflationary pressures to be short-lived.
Meanwhile, the 10-year Treasury pulled back from the highest level in about two months, as U.S. equity markets finished lower, perhaps, underpinning appetite for safe-havens like Treasurys.
A few fixed-income investors speculated that Tuesday’s selling in benchmark bonds might have been tied to fresh fears of inflation. Talk of so-called stagflation — an economic environment marked by high unemployment, high inflation, and low economic growth — also is being bandied about.
St. Louis Federal Reserve President James Bullard, in an interview with the Financial Times published on Wednesday (paywall), said that the U.S. central bank should move toward trimming its monthly purchases of $120 billion in Treasurys and mortgage-backed securities, which have provided liquidity to the market during the COVID crisis, but increasingly also have been seen as unnecessary.
“The big picture is that the taper will get going this year and will end sometime by the first half of next year,” Bullard was quoted as saying by the FT. Bullard had previously called for the Fed to begin scaling back its bond purchases.
The Fed official argued that Friday’s weaker-than-expected jobs report for August doesn’t reflect a faltering recovery in the labor market due to the spread of the delta variant of COVID-19.
“If we can get the workers matched up and bring the pandemic under better control, it certainly looks like we’ll have a very strong labor market going into next year,” Bullard said. The St. Louis Fed president isn’t currently a voting member of the central bank’s rate-setting Federal Open Market Committee, but he will be next year.
Also worth noting, Treasury Secretary Janet Yellen said in a letter to congressional leaders Wednesday that the department could run out of room next month to keep paying the government’s bills unless Congress steps in to suspend or raise the federal borrowing limit.
In economic data, a report on the amount of job openings in July rose to a record 10.9 million from a revised 10.2 million in the prior month, the Labor Department said Wednesday. That’s the fifth straight record monthly high.
What analysts are saying
“The Beige Book’s descriptions of growth, employment and inflation are all somewhat less optimistic than what we saw in the prior rendition of the Beige Book. Nothing here suggests that Fed officials are thinking that we are seeing any incremental “substantial further progress” in meeting their goals for the recovery,” wrote Jefferies economists at Thomas Simons and Aneta Markowska.