Yields for government debt with longer maturities were retreating slightly Tuesday morning, but the 2-year yield continued its ascent, with Federal Reserve Chairman Jerome Powell expected to win a second, four-year term to lead the central bank, but not before he faces a grilling in front of a Senate panel later in the day.
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What are yields doing?
- The 10-year Treasury note TMUBMUSD10Y, 1.768% yields 1.761%, down from 1.779% at 3 p.m. Eastern Time, which had left yields at their highest since Jan. 17, 2020. Yields move in the opposite direction to prices.
- The 2-year Treaury note TMUBMUSD02Y, 0.934% rate was at 0.931%, up from 0.904% on Monday adding to its climb to its highest rate since Feb. 27, 2020.
- The 30-year Treasury bond TMUBMUSD30Y, 2.088% yields 2.073%, versus 2.109% a day ago.
What’s driving the market?
Powell is set to tell Congress Tuesday that the Fed will take steps to make sure higher inflation seen over the past year doesn’t become entrenched in the economy, emphasizing that the central bank will use all of its tools to root out pricing pressures that arose during the COVID pandemic.
“We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched,” Powell will say, according to a copy of his prepared remarks to the Senate Banking Committee released Monday.
Fed Gov. Lael Brainard will testify on Thursday in front of the same Senate panel, as she aims to succeed Vice Chairman Richard Clarida, who will step down on Friday, two weeks earlier than expected after becoming embroiled in a controversy involving a stock transaction in 2020.
Later in the day, Kansas City Fed President Esther George and St. Louis Fed President James Bullard are also expected to deliver speeches.
Market expectations for a series of rate increases in 2022 have been growing.
Deutsche Bank’s economists said that they expect four hikes in 2022, starting in March, and Goldman Sachs Groupeconomists raised their forecast for 2022 rate increases, to four from three as the Fed wrangles with inflation.
On Wednesday, investors will watch for a report on inflation, the consumer-price index, which is expected to show a 7.1% headline year-over year figure for December, which would be the highest level in four decades.
Looking ahead, an auction of $ 52 billion in 3-year notes TMUBMUSD03Y, 1.218% is set for 1 p.m. Eastern Time.
What strategists are saying
- “More relevant will be Powell’s testimony this morning. His prepared remarks include the observation that ‘we can begin to see that the post-pandemic economy is likely to be different in some respects. The pursuit of our goals will need to take these differences into account. To that end, monetary policy must take a broad and forward-looking view, keeping pace with an ever-evolving economy.’ The implication being that the realities of the post-pandemic real economy warrant a monetary policy response sooner than might have otherwise been the case had the new normal more closely resembled the old one,” wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.