Bond Report: Treasury yieldsend lower market after Powell testimony, debt auctions


Treasury yields fell for a second day Tuesday as the market parsed testimony from the Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen, in their first of two days of talks about the U.S. economic recovery from the COVID pandemic in front of congressional lawmakers.

Debt investors also digested some $60 billion in short-term government paper, which was viewed as the first leg of a test of the market’s ability to absorb some $180 billion in Treasurys, experts said.

How are Treasurys faring?
  • The 10-year Treasury note

    yield was at 1.637%, down 4.5 basis points, after putting in its biggest yield drop since March 9 on Monday at 3 p.m. ET.
  • The 30-year Treasury bond

    was yielding 2.348%, off 3.3 basis points, after putting in its steepest yield drop since Feb. 26 a day ago.
  • The 2-year Treasury note

    was yielding 0.147%, compared with 0.149% on Monday.

Bond prices rise as yields fall.

What’s driving Treasurys?

Bond-market investors have been focused on rapidly rising yields of Treasurys on concerns about a pickup in inflation in 2021 as the economy recovers with help from President Joe Biden’s $1.9 trillion fiscal stimulus, but the week so far has offered some respite from the steady selloff in bonds.

Part of the pullback in yields has been attributed to the extension of COVID lockdowns in Europe, which has tamped down some optimism about a rapid recovery from the pandemic.

Analysts said investors were little moved by the first of two days of testimony by Fed Chairman Powell and Yellen. Powell reiterated the Fed’s commitment to easy monetary policy, and said he didn’t think any surge in inflation this year will be large or persistent. He argued that the Fed has the tools to deal with higher inflation.

Meanwhile, investors took down some $60 billion in 2-year notes on Tuesday, part of the first leg of some $183 billion in short- and intermediate-dated debt.

The auctions come as the Fed has said that it plans to end regulatory capital relief for banks. The move has been viewed as one factor behind the rise in yields, as it could remove a major buyer of Treasurys if banks no longer can exclude Treasurys and deposits held at the central bank from their so-called supplementary leverage ratios, or SLR, a key measure of balance-sheet strength.

On Wednesday, the market will see a $61 billion offering of 5-year notes

and $62 billion in 7-year notes

on Thursday.

The Wall Street Journal reports that the Biden administration is crafting a plan for a multipart infrastructure and economic package that could cost as much as $3 trillion, fresh off the administrations $1.9 trillion COVID package.

Fed Gov. Lael Brainard on Tuesday said that she advocated for patient monetary policy, where the Fed awaits outcomes rather than acting solely on forecasts, will be most effective in reaching the central bank’s goals of maximum employment and stable 2% average inflation.

In Europe, the European Central Bank increased its asset purchase under its Pandemic Emergency Purchase Program, or PEPP, as the weekly report of bond-buying confirmed yesterday.

What are fixed-income strategists saying?

“2-year yields have been holding relatively steady and we expect that they will hold in well through month-end. Investors have been trying to pinpoint the timing of Fed liftoff since the release of the most recent ‘dots.’ but no dates in the 2-year time horizon have become popular targets as of yet,” wrote Thomas Simons and Aneta Markowska, economists at Jefferies. “Until then, we expect this area of the curve to be safe,’ they said.

“Overall, the stats generated by the auction were solid but unspectacular. They all came close to average,” the Jefferies duo wrote.

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