(Bloomberg) — Treasury traders are looking for Federal Reserve Chair Jerome Powell to provide some calm after a volatile few sessions that have sent yields on what one bank described as a “roller-coaster ride.”
Ten-year yields have swung in a 25-basis-point range in the past three sessions, having initially been thrown higher by the Fed’s comments that brought forward bets on interest-rate hikes. Monday’s trading encapsulated that volatility, with yields initially dropping to 1.35% before climbing to 1.50% by the session close — the largest gap since February. The 10-year rate has eased back to 1.485% in U.S. trading Tuesday.
Powell is set to testify to the U.S. Congress on the pandemic response and the economy. In written remarks prepared for the testimony, he said that inflation should move back toward the U.S. central bank’s 2% target once supply imbalances resolve. The key for traders will be whether he can rein in some of the current turbulence.
“We’ve seen already over the course of this year that when we have a miscommunication or misstep from the Fed we have a particularly large move in the 10-year,” Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management, told Bloomberg Television. “Then nothing does particularly well in that period. We should just brace ourselves for that volatility and not lose our head.”
In the meantime, investors are left trying to digest comments from other Fed officials. New York Fed President John Williams said the economy is a ways off from “substantial further progress,” and his counterpart from St. Louis, James Bullard, said it seems unlikely the central bank would raise rates while it is tapering bond purchases. Dallas Fed President Robert Kaplan said he favors starting the process of tapering “sooner rather than later.”
U.S. 10-year breakevens, a yardstick for reflation expectations, have come off the more-than three-month low touched last week as traders bet on the Fed’s more hawkish stance capping price rises. The yield gap between five-and 30-year Treasury yields — another proxy for the inflation outlook — has also widened almost 18 basis points from its nadir.
It’s been a “roller coaster ride,” wrote Commerzbank strategists Christoph Rieger and Cem Keltek in a note to clients digesting some of the fierce moves on Monday. “Powell should be keen not to stir further market volatility and squash inflation expectations.”
Global Inflation
Global investors are paying close attention to Powell’s comments too, with any moves in Treasuries likely to ripple elsewhere, as well as potentially altering the outlook for other central banks. Demand for a sale of Spanish 10-year bonds on Tuesday stood at almost 40 billion euros ($47.6 billion) short of its record, while German bonds have fallen this week on events the other side of the Atlantic, as well as expectations for more borrowing next year.
The Bank of England is set for a decision on interest rates Thursday. Chief Economist Andy Haldane, who will attend his final Monetary Policy Committee decision, may emphasize the risk of price growth getting out of control. He’s so far been the sole advocate on the panel for dialing down stimulus, though that may change according to Mizuho International Plc.
“The Fed’s decision to stop inflation expectations from rising to uncomfortable levels is likely to be followed by other central banks,” said Peter Chatwell, head of multi-asset strategy at Mizuho. “We expect the BOE to mimic the Fed, as inflation expectations in the U.K. are running higher than in the U.S.”
(Updates yield levels in second and sixth paragraphs.)
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