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Bond Report: 10- and 30-year Treasury yields post biggest monthly drops since July amid omicron fears and hawkish pivot by Federal Reserve’s Powell

Ten- and 30-year Treasury yields fell on Tuesday and posted their biggest monthly declines since July, as investors assessed a possibly faster-than-expected tapering timeline from the Federal Reserve and threats posed by the omicron variant of the coronavirus.

Meanwhile, the 2-year yield rose on traders’ expectations for an accelerated start to the Fed’s next rate-hike cycle, flattening the widely followed spread between 2- and 10-year rates.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.456%

tumbled 8.9 basis points to 1.440% on Tuesday, down from 1.529% at 3 p.m. Eastern on Monday. Yields and debt prices move in opposite directions.

The 30-year Treasury bond
TMUBMUSD30Y,
1.802%

yield fell 9.5 basis points to 1.784%, down from 1.879% late Monday.

For the month, the 10-year rate declined 11.5 basis points and the 30-year yield fell 15.7 basis points, both of which were the largest monthly declines for each yield since July, based on 3 p.m. levels, according to Dow Jones Market Data.

The 2-year Treasury yield BX:TMUBMUSD02Y rose 1.6 basis points for the day to 0.524% from 0.508% Monday afternoon. It is up by 3.3 basis points for the month.

What’s driving the market?

In testimony to the Senate Banking Committee on Tuesday, Powell surprised financial markets by saying it’s appropriate for policy makers to consider wrapping up the tapering of bond purchases by possibly a few months sooner than expected.

His focus on the potential for an accelerated tapering timeline, given a “very strong” economy and “high” inflation pressures, caught investors off guard. Losses for U.S. stocks deepened after Powell spoke, while a widely followed part of the Treasury curve flattened even further as traders factored in the likelihood of rate hikes in the next two years, as well as a diminished longer-term economic outlook.

Read: Traders raise expectations for accelerated rate hikes by Federal Reserve after Powell speaks, flattening Treasury curve even further

Treasury yields turned mixed on Tuesday after having been broadly lower during the New York morning. Early in the day, investors sought safety in Treasurys across the board after Moderna Inc.
MRNA,
-4.36%

Chief Executive Stéphane Bancel told the Financial Times that existing vaccines will likely be less effective against the omicron variant discovered late last week in southern Africa.

“I think it’s going to be a material drop” in effectiveness, he said. “I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to…are like, ‘This is not going to be good’.”

Key Words: ‘This is not going to be good’ — Moderna CEO on what scientists are telling him about the omicron coronavirus variant

Data released Tuesday showed the Chicago Business Barometer, also known as the Chicago PMI, and the U.S. consumer confidence index both slumping to their lowest in nine months.

Meanwhile, home-price appreciation occurred at a slower pace in September, suggesting the market is cooling after over a frenzied year of sales. The S&P CoreLogic Case-Shiller 20-city price index posted a 19.1% year-over-year gain in September, down from 19.6% the previous month.

See: Only 10% of investors see omicron as biggest threat to financial markets by year-end: flash poll

What are analysts saying?

“Fed Chair Powell’s Congressional testimony today was a fair bit more hawkish than the prepared remarks,” JPMorgan Chase & Co.’s Michael Feroli wrote in a note. “Given the consistency of the message about tapering coming from the Fed in recent weeks, it now looks like it will take a deterioration in the public health situation over the next two weeks to prevent the FOMC from deciding to quicken the pace of tapering at the next meeting.”

“Markets are responding negatively to Powell’s comments, fearing more aggressive monetary tightening, but in the long run it is constructive that the Fed is indicating they take the threat of inflation seriously,” said Bill Merz, head of fixed income research at U.S. Bank Wealth Management. “It remains to be seen whether inflationary pressures wane in the coming quarters, and new COVID variants complicate the picture.”

Powell’s capitulation on the transitory description of inflation and his focus on the potential for an accelerated tapering of bond purchases “is very surprising to the market in light of the fact that Chair Powell had been steadfastly dovish on inflation and that the omicron variant did not bolster his dovish position,” said Jay Hatfield, chief executive and portfolio manager at Infrastructure Capital Management. “This development takes away the only positive presented by the omicron variant — the potential for more dovish Fed policy.”

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