While Treasuries were little changed during Powell’s long-awaited speech in Jackson Hole, Wyoming, yields pushed up after it concluded as the hawkish message appeared to sink in.The moves pushed the yield on two-year Treasuries, which are highly sensitive to the Fed’s policy shifts, up 7 basis points to 5.09%, just short of July’s 5.12% peak.
The five-year real — or inflation adjusted — yield rose beyond 2.26% after Powell spoke, hitting the highest level since 2008 and signaling that investors expect credit conditions to remain tight.
The moves were relatively muted, given the recent volatility in the bond market. But they underscored the growing conviction that the Fed is likely to keep monetary policy tight to prevent the resilient economy from reigniting inflation.
“What did stand out from Powell’s speech was the reference to above-trend growth and the labor market,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “And if the jobs numbers continue to come in as they have, another rate hike is on the cards.”
Futures traders are pricing in a roughly two-thirds chance that the central bank will raise its key interest rate by a quarter percentage point in November after a likely pause at its meeting next month.Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investments, said that’s setting the stage for further pressure on shorter-dated Treasuries, with recent data likely to lead policymakers to mark up their forecasts at the September meeting. “That means the two-year is higher,” he said.
Powell’s speech came on the heels of a downturn in the bond market this month, when long-term rates rose sharply as expectations of a recession receded.
Yields initially dipped as Powell spoke, then began heading higher as he stuck to a hawkish tone. “Two percent is and will remain our inflation target,” said Powell and he indicated that the Fed’s view of its neutral policy rate remained in flux.
Both nominal and inflation-adjusted Treasury yields have risen sharply this month as the market has priced in a higher long-run policy rate beyond the roughly 2.5% the Fed currently considers neutral to growth.
“The 2% inflation target is firm, there is a tightening bias,” said Jan Nevruzi, US rates strategist at NatWest Markets. Powell’s tone implies the Fed “won’t necessarily hike at every meeting, but also doesn’t mean they see the cycle as definitively over.”