Yields retreat from more than one-year highs

CHICAGO: US Treasury yields eased on Friday from more than one-year highs and the market largely shrugged off a Federal Reserve announcement that it was letting a temporary bank leverage exemption rule expire. The benchmark 10-year note yield was last up less than a basis point at 1.737%. On Thursday, it soared to 1.7540%, a level not seen since January 2020 before the coronavirus pandemic sent yields and stocks crashing.

The 30-year bond yield also eased after reaching 2.518% on Thursday, its highest since August 2019. It was last less than a basis point lower at 2.4685%.

The yield spike was fueled by this week's Fed policy meeting, which boosted economic growth expectations for 2021, with Fed Chair Jerome Powell on Wednesday repeating pledges to hold interest rates steady in an effort to keep economic recovery on track even if inflation breached its 2% target this year.

The pullback in yields was not too surprising, according to Ryan Swift, US bond strategist at BCA Research in Montreal.

"Ultimately, what we're seeing now is a great deal of tension between market prices that embed several rate hikes before the end of 2023 and the Fed's forecast that doesn't expect liftoff until 2024," he said.

"This divergence in funds rate forecasts will lead to a great deal of volatility in rates markets until the economic data eventually paint a clearer picture of whether the Fed's forecast or the market's forecast is more correct."

The Fed said it would let a temporary bank leverage rule exemption expire on March 31. The expiration of the rule, which was put into place in April 2020 to ease stress in the Treasury market due to the COVID-19 pandemic, means banks will have to resume holding an extra layer of loss-absorbing capital against their US Treasuries and central bank deposits.

Justin Lederer, Treasury analyst at Cantor Fitzgerald in New York, said the Fed's move had already been priced into the market.

"Dealer Treasury holdings have fallen off sharply over the last few weeks, so I think it already took place," he said. "The actual headline was just noise."

Looking ahead to next week, the Treasury will offer $60 billion of two-year notes on Tuesday, $61 billion of five-year notes on Wednesday, and $62 billion of seven-year notes on Thursday.

Lederer said the five- and seven-year note auctions could be tone setters for the market in terms of participation from non-dealers.

"That could be a sign of whether we hit levels that are supportive if you see some decent sponsorship," he said.

The two-year Treasury yield, which typically moves in step with interest rate expectations, was last down less than a basis point at 0.1532%.

A closely watched part of the yield curve, which measures the gap between yields on two- and 10-year Treasury notes , was 3.91 basis points steeper from Thursday's close at 158.66 basis points.