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Bond Report: U.S. 30-year Treasury yield knocks on 2.50% mark, climbing to July 2019 high

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U.S. Treasury yields surged again 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,
1.718%

climbed 8.9 basis points to a 14-month high of 1.730%, temporarily shooting above 1.75%. The 2-year note rate
TMUBMUSD02Y,
0.165%

was up 3 basis points to 0.159%, while the 30-year bond yield
TMUBMUSD30Y,
2.465%

gained 3.8 basis points to 2.476%, its highest since July 2019.

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

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.

Read: The Fed is dovish but bond yields are soaring. What gives?

The rise in long-term Treasury yields, reflecting economic recovery and potential inflation, was one of the factors cited for the renewed pain in U.S. equities, with the technology-laden Nasdaq index trading down over nearly 3% as economic growth is seen boosting cyclical stocks at the expense of internet based businesses that did well from the work-from-home trend during the coronavirus pandemic.

In U.S. economic data on Thursday, weekly initial jobless claims ran at 770,000. The Philadelphia Fed manufacturing survey surged to a reading of 51.8 this month, from 23.1 in February.

What did market participants say?

“The most convincing argument for an even higher rate plateau than that which was in place prior to the pandemic is based on the magnitude of the policy response in both fiscal and monetary terms,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

“The reflation trade is predicated on the risk that official efforts to reengage the displaced labor force and provide a bridge into a post-pandemic world will result in an inflationary environment well beyond the Fed’s target of 2.0%,” said Lyngen.

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