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Bond Report: U.S. 10-year Treasury yield jumps to above 1.75%

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U.S. Treasury yields surged overnight Thursday as investors dumped government bonds even after the Federal Reserve doubled down on its dovish monetary policy messaging at its meeting on Wednesday.

What are Treasurys doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.742%

climbed 9 basis points to 1.731%, temporarily shooting above 1.75%. The 2-year note rate
TMUBMUSD02Y,
0.149%

was up 1.6 basis points to 0.145%, while the 30-year bond yiel
TMUBMUSD30Y,
2.504%

d gained 5.1 basis points to 2.489%.

What’s driving Treasurys?

The Fed said on Wednesday it expects to see economic growth of 6.5% in 2021 and inflation rise to 2.2% this year as measured by personal consumption expenditures. The central bank’s stated goal is to keep inflation at 2% over the long run.

But Fed Chairman Jerome Powell said the central bank was still far away from discussing the conditions for tapering its asset purchases, a key step before the Fed then decides to hike its policy interest rates.

See: Fed recommits to keeping interest rates low despite some inflation overshoot

So after a Fed meeting that had pushed back on the market’s hawkish expectations for a rise in policy interest rates sooner than expected to combat rising inflation, investors were puzzled to find yields renewing their rise.

Analysts said this could reflect the Fed’s challenge of maintaining the credibility of its dovish stance in the face of enormous uncertainty around inflation, fiscal policy and a unique economic recovery.

The rise in long-term Treasury yields was inflicting renewed pain on U.S. equities, with futures contracts on the technology-laden Nasdaq index leading the losses on Thursday.

In U.S. economic data on Thursday, weekly initial jobless claims were expected to come in at a reading of 700,000. A March gauge of the Philadelphia Fed manufacturing survey was also due in the morning.

What did market participants say?

“The difficulty in predicting the future given the Fed’s change in policy approach, the possibility of an economic regime change now the Democrats are in power and the fact that we are emerging from a crisis that is unprecedented in living memory all help explain the very notable rise in” the extra yield compensation investors demand to own longer-dated bonds over shorter-dated maturities, said analysts at Rabobank.

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