Bond Report: 30-Yr Treasury Yield Exhibits Greatest Drop in 2 Months in Submit-Fed Turmoil

US Treasury bond yields rose around Thursday, with long-dated Treasuries seeing their biggest slump in weeks, a day after the Federal Reserve took a more restrictive stance on monetary policy, suggesting that policy rates may be raised earlier than expected Inflation could turn out hotter than previously forecast.

How Treasurys perform

The 10-year treasury note
found 1.509% compared to 1.569% at 3 p.m. Eastern Time on Wednesday, marking the steepest decline since June 4th, according to Dow Jones Market Data.

The 30-year government bond
was 2.099% down from 2.211% on Wednesday, the largest drop since April 15th.

2 year Treasury note yield
further rose to 0.211% from 0.203% a day ago after a sharp rise on Wednesday.

The belly of the yield curve

The 3-year government bond
slightly increased to 0.413%, the 5-year Treasury
The yield saw its biggest drop since June 10, after rising sharply on Wednesday, at 0.941 while the 7-year US Treasury bond held
saw the biggest drop in yields since June 9th to 1.397%

Important drivers for fixed income securities

Yields at the back of the curve fell sharply on Thursday, with the 10-year Treasury hitting 1.44% before bouncing back somewhat. There weren't many clear reasons for the moves, but traders and strategists attributed the swings in part to short positioning, the unwinding of bond bets, and the view that government bond yields are out of whack with inflation expectations that have been reduced could be on Thursday.

The yield curve, which reflects the difference between long- and short-term debt, has also flattened.

Data compiled by TradeWeb shows that the 10-30 year yield spread is 58.9 basis points, the flattest since April 2020. But the spread between the 5 and 30 year old closed at 122.1 bps, marking its flattest since close November and the 5-10 year spread is 63.0 bps, the flattest since the end of January.

Yields rose sharply on Wednesday as the Federal Reserve Open Markets Committee left policy rates unchanged in a range between 0% and 0.25%, but signaled a rate hike earlier than expected.

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The Fed's median forecast showed that officials expect to raise the key rate from the current range near zero to 0.6% by the end of 2023.

The Fed projected inflation to rise 3.4% by the end of 2021, up from 2.4% in March, with some fixed income analysts and economists concerned that the central bank's current stance could risk inflation overshooting.

At a press conference Wednesday to discuss Fed policies, Powell said inflation was hotter than expected and possibly more stubborn.

On asset purchases, the Fed said it will not curb its $ 120 billion monthly bond purchases until "significant further progress" is made in the economy. Powell referred to the June meeting as the "talking about talking about" meeting about buying assets.

Read: Corporate bond spreads hit a new low after 2008 despite the debt boom and inflation concerns

Recent data suggesting rising prices led many to expect that the Fed would start at least early discussions about curbing some of its ultra-accommodative policies to cushion the economy against the COVID-19 pandemic, but the central bank's policy statement was deemed to have been interpreted more restrictively than some expected.

Some analysts speculate that the Fed might hint at its plans to cut its bond purchases by the Jackson Hole Symposium on August 26-28, then make a more formal announcement in the fall that begins by early 2022.

In Thursday's economic data, US initial jobless claims rose 37,000 to 412,000 for the week ending June 12, their highest level in a month. Economists polled by the Wall Street Journal had forecast that new applications will drop to a seasonally adjusted 365,000.

Regardless, the Philadelphia area's manufacturing activity, the Philly Fed's index of manufacturing, fell slightly in June. The current general activity index fell from 31.5 in May to 30.7 in June, largely in line with the consensus forecast of 30 economists polled by the Wall Street Journal.

What do strategists say?

“The sleepy or misguided Fed theme is not going to work for the next few months, so prices need to be traded closer to flows and fundamentals. The dollar strength is the big driver on the global stock markets this morning and contributes to yesterday's profit, ”wrote Jim Vogel, Executive v.p. at FHN Financial, in a research note on Thursday.

"Essentially, the financial markets are recalibrating themselves to the Fed's updated rate hike forecasts and the realization that the QE rejuvenation will come into play in Q4 / Q1," write Ian Lyngen and Ben Jeffery, strategists at BMO Capital Markets.

“While the punchbowl should eventually be removed, the initial stages of the move seem to focus appropriately on inflation expectations – as the break-evens and commodity prices show. Domestic stocks, while initially under pressure, have managed to stay much closer to highs than the Fed's restrictive offers otherwise suggested, ”they said.

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