Treasury Yields Surge as Fed Officials Quash Policy Pivot Talk

(Bloomberg) — Treasury yields jumped Tuesday after Federal Reserve policy makers’ comments that they’re not close to done fighting inflation prompted traders to reduce bets on rate cuts next year.

Most Read from Bloomberg

US yields increased across the curve, with 10-year rates climbing as much as 18 basis points to 2.75% and the three-year rate rising more than 24 points. Bonds also tumbled as US House Speaker Nancy Pelosi’s visit in Taiwan failed to further undermine risk sentiment in financial markets.

The rise in yields, most from the lowest levels since April, gathered pace after San Francisco Fed President Mary Daly said the central bank is “nowhere near” being almost done in fighting the hottest inflation in four decades. Then Chicago Fed President Charles Evans signaled that the central bank needs to keep raising rates next year to contain price pressures. Over the weekend, Minneapolis Fed President Neel Kashkari said that there’s “a long way away from” achieving the central bank’s target.

Ten-year real yields had dropped by more than 20 basis points since last week’s Fed policy meeting, when Fed Chair Jerome Powell said future rate increases might be smaller. Some investors took the comments as a sign of the peak of Fed hawkishness.

“The big drivers of the rise in yields is that both Daly and Evans came out pretty hawkish,” said Glen Capelo, managing director at Mischler Financial. “Also the fact that Pelosi’s plane landed without any fireworks and the rhetoric coming off, pushed yields higher.”

The rate markets now expect the Fed to raise the benchmark interest rates to about 3.4% by December, an increase of 13 basis points from Monday. The Fed last week raised the range for the benchmark rate 75 basis points to 2.25%-2.5%.

Investors also pared expectations of rate cuts for next year. The swap contract referencing the June 2023 meeting rose to 3.27% from 3.02% Monday.

Evans said he’s hopeful that a range of 3.25%-3.5% by year-end and 3.75%-4% by the second quarter will be sufficiently high to cool inflation.

Another catalyst for the selloff was another heavy corporate new-issue calendar, following Monday’s $15.4 billion haul. A $6 billion offering from Intel Corp. led a slate of seven deals expected to be priced Tuesday.

Large daily yield swings in the $23 trillion US Treasuries market have become more commonplace this year as uncertainty over the path of Fed policy, inflation, and growth has grown. Dealers also blame ebbing liquidity since the Fed ended its Treasury purchases earlier this year and has stopped rolling over all of its maturing holdings.

Chaos in Bond Market Is Dangerous Side Effect of Inflation Fight

A Bloomberg measure of Treasury liquidity is at its worst level since trading seized up during the March 2020 onset of Covid-19.

Tuesday’s moves are unusual even by recent standards. Three-year yields this year have risen more than 20 basis points in a day only twice before, five-year yields only once before. The 10-year is also headed for its second-biggest daily increase.

The angst around Pelosi’s trip is set to also build on a trend of deglobalization that’s been happening over recent years, which is creating added structural inflation risk, Capelo said.

A giant Chinese supplier of electric-vehicle batteries decided to push back announcing a multibillion-dollar North American plant to supply Tesla Inc. and Ford Motor Co. due to tensions raised by House Speaker Nancy Pelosi’s trip to Taiwan, according to people familiar with the matter.

Also Tuesday Cleveland Fed President Loretta Mester said in a virtual interview with the Washington Post that the Fed is committed to bringing inflation under control.

“We knew that the Powell dovishness of last week was misplaced,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. “Daly reset that tone this morning with an uber hawkish speech” Tuesday.

(Adds comments by Fed’s Mester, updates yield levels. A previous version was corrected to fix yield change in first deck headline.)