The margin between US shorter- and longer-dated yields narrowed on Tuesday after Federal Reserve Chairman Jerome Powell said data since December pointed to a strengthening economy and his confidence had increased that inflation will rise. His outlook spooked traders who now fear the US central bank might raise key short-term borrowing costs four times in 2018, one more rate increase than they had previously thought.
A faster path of Fed rate hikes will likely keep a lid on longer-dated yields. Powell expressed his view during the question-and-answer section of his first semi-annual economic testimony as Fed chief before the House Financial Services Committee. "The view is that he reinforced the view of a March rate hike and added to expectations for a higher number of rate hikes going forward," said John Canavan, market strategist at Stone & McCarthy Research Associates in New York.
Futures market implied traders have almost priced in the chances of the Fed's next rate increase at its March 20-21 meeting. Before Powell's Q&A, Treasury yields were lower on his prepared remarks for his House appearance, which suggested no departure from the Fed's current stance set by his predecessors, Janet Yellen and Ben Bernanke, analysts said.
"The (Federal Open Market Committee) will continue to strike a balance between avoiding an overheating economy and bringing ... price inflation to 2 percent on a sustained basis," Powell said in prepared remarks. Powell will complete his semiannual testimony before the Senate Banking Committee on Thursday. The benchmark 10-year Treasury yield was 2.901 percent, up 4 basis points from late on Monday, while the two-year yield was 2.266 percent, over 3 basis points on the day.
The rise in longer-dated yields was capped by safe-haven bids stemming from a sell-off on Wall Street as Powell's economic outlook stoked rate-hike worries. The spread between five-year and 30-year Treasury yields contracted by 3 basis points to 51 basis points. It remained above the decade low of 40 basis points reached on February 1, Tradeweb data showed. Some analysts have been concerned the yield curve may eventually invert where shorter-dated yields are higher than longer-dated ones, which has often preceded previous US recessions.
In his House testimony, Powell, when asked, downplayed concerns about a curve inversion.