U.S. yields advance on hawkish Fed rhetoric; nervousness around Pelosi’s Taiwan trip eases


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NEW YORK — U.S. Treasury yields rose across

the board on Tuesday in volatile trading, lifted by hawkish

comments from Federal Reserve officials that suggested more rate

hikes are coming in the near term, as inflation has yet to hit

its peak.

Worries about global tension arising from U.S. House of

Representatives Speaker Nancy Pelosi’s visit to Taiwan eased a

bit, with the U.S. official landing safely in its capital

Taipei, analysts said.

The front end and intermediate part of the curve increased

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sharply, from anywhere between 16 to 20 basis points. U.S.

two-year yields, which reflect rate expectations, rose to

one-week highs and were last up 16.6 bps 3.0753%.

The U.S. benchmark 10-year yield rallied from a four-month

low of 2.516% to last trade 13 bps higher at 2.7355%

.

On Tuesday, two of the Fed’s more “dovish” policymakers —

San Francisco Fed President Mary Daly and Chicago Fed President

Charles Evans — signaled they and their colleagues remain

resolute and “completely united” on getting U.S. interest rates

up to a level that will more significantly curb economic

activity.

Cleveland Fed President Loretta Mester, a voting member of

the Federal Open Market Committee this year, also joined the

chorus of officials, who believe more needs to be done to curb

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inflation.

Their comments came after Fed Chair Jerome Powell suggested

that the central bank could slow the pace of its rate increases

in coming months if there is evidence that tighter monetary

policy is taming the worst U.S. inflation in four decades.

“The bond market is reacting to comments by Fed officials

that just directly address the initial market reaction to the

rate decision last week. It seemed like some market participants

viewed the decision as somewhat dovish,” said Chip Hughey,

managing director, fixed income, at Truist Advisory Services in

Richmond, Virginia.

“We did not view it that way. The main change is the idea

that the Fed would remove a level of transparency in its future

policy news because data is evolving quickly. To telegraph

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policy far ahead of time is very difficult when each inflation

reading carries so much importance,” he added.

The focus on Pelosi’s Taiwan trip, while important because

of the geopolitical implications, eased a bit, as investors

surmised that a diplomatic resolution will somehow be worked

out.

Pelosi arrived in Taiwan late Tuesday on a trip she said

demonstrates American solidarity with the Chinese-claimed

self-ruled island, but China condemned this first such visit in

25 years as a threat to peace and stability in the Taiwan

Strait.

“I think this will be a tail event that will happen, but

will go away,” said Jay Hatfield, chief investment officer at

Infrastructure Capital Management in New York. “There will

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probably be some diplomatic flurries that won’t matter much to

U.S. markets.”

China has repeatedly warned against Pelosi going to Taiwan,

while the United States said on Monday it would not be

intimidated by Chinese “saber rattling.”

Longer-dated Treasuries were well-bid earlier in the session

since weakening U.S. economic data has markets expecting a

slowdown in both U.S. growth and the pace of rate hikes.

The U.S. 10-year yield’s fall earlier briefly pushed the gap

over three-month Treasury yields to -1.6 basis points

. That curve was last steeper on the day at

20.10 bps.

Another closely-watched part of the Treasury yield curve

measuring the spread between yields on two- and 10-year notes

deepened its inversion to -35.50 basis points

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earlier on Tuesday, the most inverted since 2000. That gap was

last at -33.9 bps.

An inversion of this yield curve typically foreshadows

recession.

August 2 Tuesday 3:15PM New York / 1915 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 2.4825 2.5331 -0.013

Six-month bills 2.8925 2.9762 0.026

Two-year note 99-219/256 3.0753 0.166

Three-year note 99-236/256 3.0275 0.202

Five-year note 99-130/256 2.8565 0.188

Seven-year note 98-196/256 2.8207 0.162

10-year note 101-32/256 2.7428 0.138

20-year bond 100-128/256 3.2154 0.097

30-year bond 97-184/256 2.9911 0.066

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 26.00 0.25

spread

U.S. 3-year dollar swap 9.75 -0.50

spread

U.S. 5-year dollar swap 3.50 0.25

spread

U.S. 10-year dollar swap 6.50 0.75

spread

U.S. 30-year dollar swap -28.25 1.25

spread

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by

Dhara Ranasinghe in London and Tom Westbrook in Singapore;

Editing by Christina Fincher and David Holmes)

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