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Bond Report: Treasury yields climb to start week as Powell’s Jackson Hole speech looms

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U.S. Treasury yields climbed Monday as investors awaited an important speech from a key policy maker later this week, which could provide the clearest insights yet about the timetable and pace of rolling back COVID-era accommodations.

Economic data releases also came in mixed, leaving rates rangebound.

What yields are doing
  • The 10-year Treasury yield
    TMUBMUSD10Y,
    1.257%

    rose to 1.272%, compared with 1.259% at 3 p.m. Eastern Time on Friday.
  • The 2-year Treasury note rate
    TMUBMUSD02Y,
    0.226%

    was at 0.234%, versus 0.224% at the end of last week.
  • The 30-year Treasury bond yield
    TMUBMUSD30Y,
    1.873%

    was at 1.885%, compared with 1.873% on Friday.

On Friday, the 10- and 30-year rates posted their biggest one-week declines since July, according to Dow Jones Market Data. The 2-year rate was higher on the week.

What’s driving the market?

Monday’s economic data releases were mixed, leaving Treasury yields rangebound. The Chicago Fed National Activity Index rose to +0.53 in July from -0.01 in June, pointing to a pickup in economic growth last month. Flash readings of services and manufacturing activity from Markit both fell in August, showing businesses suffered some erosion in growth. Existing home sales edged higher in July, as the inventory of homes for sale grew.

Monetary policy makers from around the world are set for the Aug. 26 kickoff of the annual Jackson Hole symposium, hosted by the Kansas City Federal Reserve Bank.

Analysts have been bracing for an announcement on the tapering of the Fed’s $120 billion in monthly purchases of Treasurys and mortgage-backed securities before the end of the year — making Federal Reserve Chairman Jerome Powell’s speech, set for Friday at 10 a.m. Eastern Time, a key event. The symposium is being held entirely virtual, raising the prospects for some that Powell might be disinclined to signal that tapering is in the offing.

Although many investors had believed that the Fed would be willing to hint at tapering at the Jackson Hole meeting, developments in the spread of COVID-19 are casting some doubt on the timing of any such announcement. COVID cases, driven by the spread of the delta variant, have been on the rise since early July alongside a global increase in infections, and market participants around the world have taken notice, as has the Fed.

The prospects of a sluggish recovery from the pandemic is one reason why yields, which move opposite to Treasury prices, have been relatively subdued despite growing evidence of percolating inflation and signs that the Fed wants to end easy-money policies.

Dallas Fed President Robert Kaplan, one of the most vocal proponents for beginning and finishing the tapering process early, said on Friday that he would be open to changing his thinking if evidence emerges that the spread of the delta variant is slowing the economy.

Separately, U.S. Treasury Secretary Janet Yellen told senior White House advisers she backs reappointing Powell, whose term expires in February, as Fed chairman, according to Bloomberg News. Yellen preceded Powell as Fed chief.

What analysts are saying
  • “We think Fed Chair Powell will likely use his Jackson Hole speech to build the case that the Fed is getting ever closer to meeting the ‘substantial further progress’ test for tapering QE but will not set out a taper plan or tee up a taper decision at the next FOMC meeting in September — consistent with our call that the decision will likely come in November,” wrote Evercore ISI strategists Krishna Guha and Peter Williams. “Separately we interpret media reports over the weekend as signaling that Powell is increasingly likely to be reappointed Fed chair, and that an announcement could come sooner than is widely expected. Obama chose to renominate Bernanke for a second term around Jackson Hole, and it is not impossible Biden could do the same thing,” the strategists wrote.
  • “There is a great deal of emphasis on Jackson Hole; so much so that we worry it’s unwarranted – at least insofar as investors are anticipating any grand policy revelations,” BMO Capital Markets strategist Ian Lyngen wrote in a note. “The KC Fed’s symposium isn’t a policy meeting and while historically it has provided a forum for the Chair to establish the groundwork for a policy transition, it’s unclear how much greater clarity on the precise timing and speed of tapering Powell is willing to provide at this juncture. Had the delta variant not dimmed the global macro outlook as it has, there would be a much better argument to be made that the Chair would offer market-moving tapering details. As it currently stands, the Fed doesn’t have a strong incentive to effectively pre-commit to any course of policy action – at least not more so than has already been accomplished.”
  • “Tapering speculation may cause intermittent spikes in bond yields, but we remain opportunistic because this era of low yields is likely to persist,” Scott Ruesterholz, a portfolio manager at Insight Investment, wrote in note. “The Fed has pumped more liquidity into the system than can be deployed and money funds have responded by lodging $1 trillion in cash through the overnight reverse repo system. This extreme liquidity will buffer the initial impacts of tapering.”

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