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Bond Report: Treasury bond yields are combined after lawmakers give attention to the Federal Reserve's potential to battle increased inflation

Longer-dated Treasury bond yields fell slightly on Tuesday morning, while 2-year yields continued to rise as the Washington Federal Reserve Chairman Jerome Powell's reaffirmation hearing began.

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What do returns do?

The 10-year treasury note
TMUBMUSD10Y,
1.765%
Returns 1.767%, down from 1.779% at 3:00 p.m. Eastern Time, which left returns at their highest level since Jan 17, 2020. Returns move in the opposite direction to prices.

The 2-year treasury note
TMUBMUSD02Y,
0.906%
The interest rate was 0.931%, down from 0.904% on Monday, fueling its surge to its highest level since February 27, 2020.

The 30-year government bond
TMUBMUSD30Y,
2,090%
Returns 2.083 compared to 2.109% a day ago.

What is driving the market?

Powell appeared before Congress Tuesday to present a summary of his prepared remarks. In these remarks, Powell indicated that the Fed would take steps to ensure that the higher inflation seen last year does not seize into the economy and stressed that the central bank would use all of its instruments to stamp out price pressures, during the COVID pandemic.

Market expectations for a number of rate hikes in 2022 have risen, with a greater than 70% chance of a 25bp hike in March, according to the CME FedWatch Tool. Meanwhile, economists at Deutsche Bank and Goldman Sachs Group are forecasting four hikes this year – more than the Fed has budgeted for – and JPMorgan Chase & Co.'s Jamie Dimon told CNBC on Monday that he would expect even more of them in 2022.

In a virtual speech on Tuesday, Kansas City Fed President Esther George said the central bank should swiftly reduce its enormous $ 8.5 trillion bond holdings in order to contain the highest US inflation in nearly 40 years and to take unreasonable risks. Your colleague, the President of the St. Louis Fed, James Bullard, will speak today. Looking ahead, an auction of $ 52 billion in 3-year bonds BX: TMUBMUSD03Y is scheduled at 1:00 pm. Easter time.

Wednesday's economic data also includes the consumer price index, which is expected to hit 7.1% YoY for December, which would be its highest level in four decades and has the potential to further cement market rate hike expectations.

On Thursday, Fed Governor Lael Brainard will testify before the same Senate body as Powell as she seeks to succeed Vice Chairman Richard Clarida, who will step down two weeks earlier than expected on Friday after engaging in controversy over a stock deal in 2020.

What strategists say

With fixing traders expecting 7% YoY CPI in December, plus two more readings above that level for January and February, "if we actually see these kinds of numbers, at least anyone who isn't looking" four rate hikes would adjust their forecast and would likely be forced to consider another four rate hikes in 2023, "said Tom di Galoma, managing director of Treasurys Trading at Seaport Global Holdings. "The two-year yield is the most vulnerable part of the bond market and should be 1.5% by March this year or 2% and 2.5% in early 2023."

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