Short-dated yields jump as Fed’s Powell adopts hawkish tone on inflation

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NEW YORK — Shorter-dated U.S. Treasury

yields jumped on Tuesday and the yield curve flattened after

Federal Reserve Chairman Jerome Powell said that the U.S.

central bank will “keep pushing” to tighten U.S. monetary policy

until it is clear that inflation is declining.

“What we need to see is inflation coming down in a clear and

convincing way and we’re going to keep pushing until we see

that,” Powell said at a Wall Street Journal event.

“If that involves moving past broadly understood levels of

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‘neutral’ we won’t hesitate to do that,” Powell added, referring

to the rate at which economic activity is neither stimulated nor

constrained.

The comments confirmed the market’s view that the Fed is

focused on easing price pressures even as stock market prices

wobble and some investors worry that aggressive tightening will

tip the U.S. economy into recession.

“We’ve always known that ‘neutral’ is very difficult to

estimate, and so the idea that the Fed was going hike a while

and then pause and look around was out there, and it was on the

table, but he just told us that isn’t going to occur,” said Ian

Lyngen, head of U.S. rates strategy at BMO Capital Markets in

New York.

“This is very consistent with what we’ve seen in the past,

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which is once the Fed starts hiking, they continue to hike until

something breaks. Now the question becomes, is what we should be

looking at as a potential break the equity market? is it credit?

is it housing? I think that’s going to be this cycle’s big

unknown,” Lyngen added.

Fed funds futures traders expect the U.S. central bank to

hike rates by 50 basis points each at its June and July

meetings, with the Fed’s benchmark rate likely to rise to 2.98%

by Feb., from 0.83% now.

Two-year yields, which are highly sensitive to

interest rate moves, rose to 2.704%, up 14 basis points on the

day.

Benchmark 10-year notes were last at 2.973%, up

nine basis points on the day. The yields hit a 3-1/2-year high

of 3.203% on May 9 as investors adjusted for the prospect of

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even more aggressive Fed policy.

But they have dipped in the past week as investors also

worry that the rapid monetary tightening may strangle growth and

send the economy into a downturn.

The yield curve between two-year and 10-year notes

flattened four basis points to 27 basis points.

Minneapolis Fed President Neel Kashkari said on Tuesday that

how high the Federal Reserve will ultimately need to raise U.S.

interest rates will depend in large part on how quickly supply

bottlenecks can get unstuck.

St. Louis Fed president James Bullard also said that the

U.S. economy is likely to continue growing at an above-trend

pace for at least the next 18 months, and households are likely

to continue spending as the influence of the pandemic fades.

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Yields had gained earlier in the day after data showed that

retail sales increased strongly in April, reducing fears that

the economy is weakening.

Retail sales rose 0.9% last month. Data for March was

revised higher to show sales advancing 1.4% instead of 0.5%, as

previously reported.

The data “showed no sign that the consumer is cracking under

the weight of inflation, higher interest rates or the lack of

stimulus payments,” Jefferies economists Aneta Markowska and

Thomas Simons said in a report.

A separate report from the Fed on Tuesday showed production

at U.S. factories increased more than expected in April amid

continued strong demand for motor vehicles and other goods,

which should help to underpin manufacturing activity.

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U.S. business inventories also increased slightly more than

expected in March, lifted by a jump in motor vehicle stocks,

government data showed.

May 17 Tuesday 3:21PM New York / 1921 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 1.055 1.0725 0.005

Six-month bills 1.52 1.553 0.026

Two-year note 99-157/256 2.7044 0.136

Three-year note 99-152/256 2.8927 0.146

Five-year note 99-16/256 2.9547 0.135

Seven-year note 99-56/256 3.0002 0.118

10-year note 99-40/256 2.9732 0.094

20-year bond 85-172/256 3.3748 0.069

30-year bond 94-104/256 3.1652 0.081

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 27.25 -0.75

spread

U.S. 3-year dollar swap 12.00 -0.25

spread

U.S. 5-year dollar swap 3.00 -1.00

spread

U.S. 10-year dollar swap 6.00 -0.50

spread

U.S. 30-year dollar swap -26.00 -0.50

spread

(Reporting by Karen Brettell; editing by Jonathan Oatis and

Nick Zieminski)