Treasury yields hit highest levels since 2019 as Fed’s Powell leaves door open for half-point rate hikes

Treasuries sold off sharply on Monday, pushing the yield on the 10-year Treasury above the 2.30% threshold, as Federal Reserve Chairman Jerome Powell warned that policymakers were willing to raise rates in half-point increments if necessary to control inflation.

What do yields do?
  • The yield of the 10-year Treasury note TMUBMUSD10Y,
    was at 2.315% as of 3 p.m. EST, its highest since May 24, 2019 and up 16.9 basis points from 2.146% at the same time Friday. Based on 3 p.m. levels, Monday’s rise in yields was the largest in 10 years since March 18, 2020, according to Dow Jones Market Data.

  • The yield of the 2-year Treasury bills TMUBMUSD02Y,
    jumped to 2.132%, also the highest since May 24, 2019. That compared to 1.955% on Friday afternoon.

  • The yield of the 30-year Treasury note TMUBMUSD30Y,
    rose to 2.535% from 2.417% on Friday evening, its highest since July 30, 2019.

What is driving the market?

“If we conclude that it is appropriate to act more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said in remarks. at the National Association for Business Economics.

The Fed chief stressed the need to tighten monetary policy quickly, warning that the upward pressure on prices from the Ukraine invasion comes at a time of “already too high inflation.”

Powell said the Fed was willing to raise the federal funds rate above what is known as the neutral rate if necessary. The neutral rate is the level at which policymakers believe the policy is neither slowing nor accelerating growth. Fed officials largely see the neutral rate, assuming 2% inflation, at around 2.5%, according to the Wall Street Journal.

Major central banks, including the Fed, have expressed concern about the ability of Russia’s war on Ukraine to fuel already high inflation via soaring oil and other commodity prices.

On Monday, the Ukrainian government refused Russian demands to return the southern port city of Mariupol as Russian forces continued to shell Ukrainian towns. Russia’s request came hours after Ukrainian authorities said Moscow forces bombed an art school that housed around 400 people.

Fierce resistance prevented Russian forces from quickly taking control of the country. The Wall Street Journal reported that senior US officials see signs that Russia is adjusting its strategy to secure its territorial objectives and using leverage to pressure kyiv into accepting neutrality between Moscow and the West.

What are the analysts saying?

“Discussing the potential of a 50 [basis point] A rise at some point will only further contribute to the market’s tendency to overprice in a more hawkish outcome than is ultimately realized,” said Ian Lyngen, head of US rates strategy at BMO Capital. Markets, in a footnote.

Powell’s message that 50 basis points in a meeting is on the table and that the Fed could increase beyond the neutral rate “is not new in itself; however, Powell decided to reiterate the message even against the backdrop of last week’s massive sell-off in Treasuries and repricing toward a steeper path of rate normalization,” he wrote.

Edward N. Arrington