Treasury Yields Change Little Following Fed Chair Testimony

Galtero Lara
Julio 20, 2018

The U.S. two-year Treasury yield rose on Tuesday to its highest level in almost a decade, with the yield curve at its flattest in almost 11 years, as Federal Reserve Chairman Jerome Powell's upbeat remarks on the economy supported traders' view of more rate hikes.

"The move is just short-term yields leaking higher as the market is pricing in more Treasury bill supply and more rate hikes", said Justin Lederer, Treasury strategist at Cantor Fitzgerald in NY.

The 2-year US Treasury yield rose Tuesday to its highest level in almost 10 years, with the yield curve at its flattest in nearly 11 years, as Fed Chairman Jerome Powell's upbeat remarks on the economy supported traders' view of more rate hikes. "The market is quite content with where long-term yields are".

Minneapolis Federal Reserve Bank President Neel Kashkari, who does not vote this year on Fed policy but takes part in the USA central bank's regular discussion of interest-rate policy, said in a Monday blog post that the flat yield curve means interest rates are close to neutral.

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Compared to a year ago, the yield on the benchmark Treasury has increased by 32.4 percent and 18.3 percent year-to-date.

Note that the Fed's own range of estimates for the neutral rate was 2.3 percent to 3.5 percent in June.

Signs of a slight pick-up in business and consumer activities in Q-2 had stoked bets the Fed may consider a faster pace of rate hikes. "This suggests that there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession", he said. 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.

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