Treasury yields rebound as investors assess Powell’s hawkish pivot, the omicron variant
Treasury yields rebounded on Wednesday as safe-haven purchases inspired by concerns over the omicron variant of the coronavirus faded and investors continued to assess the signal from Federal Reserve Chairman Jerome Powell that the central bank was ready to accelerate the reduction of its monthly asset purchases.
What do the returns do?
The yield of the 10-year Treasury bill TMUBMUSD10Y,
rose to 1.489%, from 1.44% on Tuesday at 3 p.m. EST. The yields and prices of debt move in opposite directions.
The 2-year Treasury yield TMUBMUSD02Y,
rose 0.599%, compared to 0.524% on Tuesday afternoon.
The yield on 30-year Treasury bonds TMUBMUSD30Y,
was 1.814%, compared to 1.784% on Tuesday night.
What drives the market?
Financial markets have been on a roller coaster ride in recent sessions as investors try to understand the implications of the omicron variant. Powell surprised market participants on Tuesday by opening the door to accelerating the reduction process when policymakers meet later this month.
Yields on long-term Treasuries fell on Tuesday amid new concerns over the omicron, while short-term rates rose, continuing to flatten the yield curve. Safe-haven purchases helped prop up Treasury prices, pushing yields lower, as stocks and other risky assets fell. Stock index futures indicated a rebound for stocks on Wednesday, while oil futures, which were also hit hard by omicron concerns, also picked up some of the decline in the previous session.
Powell is expected to deliver a second day of testimony to lawmakers on Wednesday.
ADP’s private sector payroll data is due at 8:15 a.m. EST, while the latest November reading of the Markit Purchasing Managers Index on manufacturing activity is expected at 9:45 a.m., while the Institute for Supply Management’s manufacturing index for November comes out at 10:00 a.m.
October data on construction spending is also expected to be released at 10 a.m. The Fed’s Beige Book of Economic Anecdotes in the Central Bank Regions is expected to be released at 2 p.m.
What are the analysts saying?
The problem for the bond market posed by the omicron variant “is not only how big of this threat is, but whether it is deflationary or inflationary,” said Steve Barrow, head of G-10 strategy at Standard Bank. .
âSo far bond yields have fallen and forward inflation measures like the five-year inflation swap starting in five years have also fallen,â he wrote. âBut most of the policymakers who have talked about it, like Fed Chairman Powell or the Bank of England’s Catherine Mann, seem to be biasing the risks toward higher inflation and we think that’s correct. ‘There is no doubt that bonds will recover and yields fall if risk aversion takes hold even more, bond bulls need to remember that the cost of the omicron could be higher inflation – and higher returns – longer term. â