#Bond Report: Treasury yields take a breather as 10-year and 30-year debt head for sharpest monthly rise since March

What yields are doing

• The 10-year Treasury note
  TMUBMUSD10Y,
  1.530%
  was at 1.530%, compared with 1.54% at 3 p.m. Eastern Time on Wednesday.

• The 2-year Treasury note
  TMUBMUSD02Y,
  0.293%
  yields 0.293%, versus 0.297%.

• The 30-year Treasury, also known as the long bond, yields
  TMUBMUSD30Y,
  2.073%
  was at 2.074%, compared with 2.089% on Wednesday.

• For the month, the 10-year note has climbed 23.7 basis points for its largest monthly rise since March, the 2-year Treasury note gained 9 basis points in September for its largest one-month advance since June, while the 30-year has climbed 16.2 basis points on the month, marking its largest monthly gain since March, according to data compiled by Dow Jones Market Data as of Wednesday’s 3 p.m. levels.

• For the quarter, so far, the 10-year note yield is up 9.7 basis points for its largest quarterly climb since March, the long bond picked up 2.4 basis points also for its largest quarterly gain since March. The 2-year note climbed 5 basis points over the past three months, marking its third straight quarterly rise and its largest three-quarter gain since 2018.

What’s driving the market?

Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen are set to provide testimony on the state of the economy to a U.S. House Committee on Financial Services at 10 a.m. Eastern Time.

On Wednesday, Powell said during a discussion hosted by the European Central Bank that inflation may be more persistent than had been anticipated. “It’s very difficult to say how big the effects will be in the meantime or how long they last.” However, he still held that they would eventually fade, a common refrain by many members of the Fed.

Still, yields have been on the rise, with investors positioning for pricing pressures that could last for longer than anticipated and could lead to a more rapid rate of interest-rate increases for the central bank.

Inflation is anathema to bonds because it erodes its fixed value.

At the ECB moderated talk Wednesday, Powell acknowledged some of the challenges that the Fed faces in achieving its mandate of price stability and a healthy jobs market in the midst of the COVID pandemic.

“Managing through that process over the next couple of years is…going to be very challenging because we have this hypothesis that inflation is going to be transitory. We think that’s right,” he said. “But we are concerned about underlying inflation expectations remaining stable, as they have so far.”

At the conclusion of the Fed’s two-day policy meeting last week, projections from members showed that half of 18 them expect to raise interest rates by the end of 2022. The central bank next meets on Nov. 2-3 where it is expected to formally announce a reduction of its monthly purchases of $120 billion in Treasury and mortgage-backed securities.

Read: Sudden realization that inflation may persist is starting to dawn on many U.S. investors

Powell may shed more light on these points at Thursday’s hearing.

Meanwhile, investors will get fresh read on those seeking U.S. unemployment benefit insurance in the week ended Sept. 25, with economists surveyed by The Wall Street Journal forecasting that jobless claims were at 335,000, from 351,000 the week prior. The data is set to be released at 8:30 a.m. ET. Markets will also at the same time be looking for a third estimate of second-quarter GDP, with consensus estimates at 6.7%, from 6.6%, according to forecasts polled by Econoday. A report on Chicago manufacturing activity is due at 9:45 a.m.

A parade of Fed speakers are on deck on Thursday, including New York Fed President John Williams at 10 a.m., Atlanta Fed President Raphael Bostic at 11 a.m., and Philadelphia Fed President Patrick Harker at 11:30 a.m., among others in the day. Harker on Wednesday said that Fed may raise interest rates in late 2022 or early 2023, will speak at 11:30 a.m.

Meanwhile, the Democratic-run Senate is expected to vote Thursday on legislation that would just avoid a partial government shutdown by keeping the federal government funded into early December.

Republican senators have blocked a House-passed bill that would prevent a shutdown but also would raise the federal borrowing limit, putting pressure on Democrats to deliver a measure that only would address a shutdown.

What analysts say

“Rate and equity markets continue to stabilize following volatility earlier in the week. When it rains it pours in this US rate market,” wrote Gregory Faranello, executive director of AmeriVet Securities and head of U.S. rates trading and strategy in New York, in a Thursday note. “And to a great extent, a reflection of suppressed volatility and price action emanating from the Federal Reserve.”

“The notion that taper is finally real, could be quicker in duration and the market immediately reaching for rate increases,” the AmeriVet Securities strategist wrote. “By the way, we think it’s unlikely the Fed raises rates in 2022. Reinforced by the events of late (committee dynamics) and an even more dovish demeanor this Fed will take next year. If it’s Brainard: think steeper not flatter. Think lower for longer,” he said.