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TREASURIES-Yields jump after Fed's Powell offers more inflation tolerance

Credit: REUTERS/SERTAC KAYAR

Longer-term U.S. Treasury yields moved to their highest levels in months on Thursday and steepened the yield curve after Federal Reserve Chairman Jerome Powell outlined an aggressive new strategy to reach the bank's 2% inflation target.

By Ross Kerber

Aug 27 (Reuters) - Longer-term U.S. Treasury yields moved to their highest levels in months on Thursday and steepened the yield curve after Federal Reserve Chairman Jerome Powell outlined an aggressive new strategy to reach the bank's 2% inflation target.

The benchmark 10-year US10YT=RR yield was up 4.6 basis points in morning trading at 0.7325% - its highest since June 23 - after Powell said the U.S. central bank would allow periods of inflation above the 2% level before hiking interest rates.[nL1N2FT0PR]

The yield on the 30-year bond US30YT=RR was up 7.2 basis points at 1.4779%.

Powell "has basically said it's an inflation target in name only, and that brought in sellers," said Tom di Galoma, managing director of Seaport Global Holdings.

"Institutions think the Fed is going to keep rates lower for longer and the Fed Funds rate is not going to move at all," he said.

Powell spoke as the Kansas City Fed began its annual economic symposium, an event that is usually held in the mountain resort of Jackson Hole, Wyoming, but is being conducted virtually this year because of the pandemic.

Powell described the results of the Fed's framework review, an initiative started nearly two years ago through public hearings and research to explore how monetary policy should be adapted for a low interest rate environment. [nL1N2FS265]

The number of Americans filing new claims for unemployment benefits hovered around 1 million last week, suggesting the labor market recovery was stalling as the COVID-19 pandemic drags on and financial aid from the government dries up.[nL1N2FS1M7]

Wall Street's main indexes also rose on Thursday after Powell's remarks.

A closely watched part of the U.S. Treasury yield curve measuring the gap between the yields on two- and 10-year Treasury notes, US2US10=TWEB seen as an indicator of economic expectations, was at 57 basis points, about 3 basis points higher than Wednesday's close and its highest since June 16.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was up about a basis point at 0.1622% in morning trading.

August 27 Thursday 10:51AM New York / 1451 GMT

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

0.0975

0.0989

0.000

Six-month bills US6MT=RR

0.11

0.1119

0.000

Two-year note US2YT=RR

99-237/256

0.1622

0.008

Three-year note US3YT=RR

99-206/256

0.1911

0.011

Five-year note US5YT=RR

99-184/256

0.3067

0.017

Seven-year note US7YT=RR

99-8/256

0.5176

0.033

10-year note US10YT=RR

98-248/256

0.7325

0.046

20-year bond US20YT=RR

97-144/256

1.2636

0.071

30-year bond US30YT=RR

97-132/256

1.4779

0.072

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

8.50

0.75

U.S. 3-year dollar swap spread

7.25

0.75

U.S. 5-year dollar swap spread

5.50

0.50

U.S. 10-year dollar swap spread

-0.75

-0.50

U.S. 30-year dollar swap spread

-37.75

-1.75

(Reporting by Ross Kerber in Boston)

((ross.kerber@thomsonreuters.com; (617) 856 4341; Reuters Messaging: Ross.Kerber.Reuters.com@Reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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