US yields edge up as Powell's remarks support rate-hike view

NEW YORK: US Treasury yields rose on Tuesday, with the two-year yield hovering near a decade high as Federal Reserve Chairman Jerome Powell was upbeat on the economy, supporting traders' view of further rate increases from the US central bank.

Powell, in testimony about the economy and monetary policy before a Senate panel, said: "With appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years."

Powell downplayed the current friction between the Trump administration and major US trade partners as a risk to business and consumer activities.

"Right now with the Fed's gradual rate increases, he will continue with that approach," said Paula Solanes, portfolio manager at SVB Asset Management in San Francisco. "He wants to normalize interest rates because they have been so low for so long."

Interest rates futures implied traders saw about an 89 percent chance the Fed would lift its target range on key interest rates by a quarter point, to 2.00 percent to 2.25 percent, at its Sept. 25-26 policy meeting, CME Group's FedWatch program showed.

That suggested traders priced in about a 63 percent likelihood of another rate hike at the Fed's Dec. 18-19 policy meeting.

Signs of a slight pick-up in business and consumer activities in the second quarter had stoked bets the Fed may consider a faster pace of rate hikes. But the consensus view remained that the Fed would refrain from turning more aggressive on hiking rates to avert inverting the yield curve.

An inverted yield curve, in which short-dated Treasury yields rise above long-dated ones, has preceded the past five US recessions.

"There's no need for them (Fed policy makers) to accelerate," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.

After his appearance in front of the Senate Banking Committee, Powell will complete his semiannual testimony before the House Financial Services Committee at 10 a.m. (1400 GMT) on Wednesday.

At 10:55 a.m. (1455 GMT), the yield on benchmark 10-year Treasury notes was 2.860 percent, up marginally from late on Monday.

The two-year yield, which is most sensitive to traders' views on changes in Fed policy, was 2.611 percent, matching the level set on Monday, which was the highest since August 2008, according to Reuters data.

The spread between two-year and 10-year Treasury yields was 24.90 basis points, hovering at its tightest level since July 2007.