Yield curve steeper as traders look for Fed inflation guidance

Longer-term US Treasury yields rose on Wednesday and steepened a closely watched part of the yield curve for the second consecutive day as traders anticipated that Federal Reserve comments would raise inflation expectations.

The benchmark 10-year yield was up 2.1 basis points at 0.703% in morning trading.

Investors were betting that when he speaks on Thursday, Fed Chair Jerome Powell will create expectations of more inflation, said Jim Vogel, interest rate strategist for FHN Financial.

"People believe they will hear a broader view of how they (the Fed) will manage inflation targets, that suggests to many people that the curve will steepen and inflation expectations will continue to rise," Vogel said. Powell and other Fed officials will speak at a virtual meeting traditionally held at the mountain resort of Jackson Hole, Wyoming. They are set to discuss the central bank's framework review to explore how monetary policy should adapt to changes in the economy.

Persistently low inflation and low interest rates have numbed the effects of the Fed's recession-fighting stimulus measures. Rising uncertainty about the economic outlook in the face of the coronavirus pandemic may add to pressure on the Fed to bolster its policy arsenal.

The Nasdaq opened higher on Wednesday after upbeat business updates from Salesforce and HP Enterprise, while the S&P 500 started on a more subdued note after closing at a record high for three sessions in a row.

Investors will watch the results of an auction of $51 billion worth of 5-year US Treasury notes due in the early afternoon. An auction of 2-year notes on Tuesday showed solid demand.

A closely watched part of the US Treasury yield curve measuring the gap between yields on 2- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 55 basis points, about 2 basis points higher than Tuesday's close and well above its recent low of 33 basis points on July 24.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was roughly unchanged at 0.1563%.