Treasury yields briefly clamber higher after Fed’s Bullard says door opened to tapering

U.S. government debt yields edged up Friday morning after St. Louis Federal Reserve President James Bullard said during a CNBC interview, that the U.S. central bank has opened to door to tapering its bond purchases and estimated that interest rates could be lifted as soon as late 2022.

How Treasurys are trading

The 10-year Treasury note yield TMUBMUSD10Y, 1.487% was off its lows at 1.506%, but down from 1.509% at 3 p.m. Eastern Time on Thursday.
The 30-year Treasury TMUBMUSD30Y, 2.044%, known as the long bond, was at 2.104%, versus 2.099% a day ago.
The 2-year Treasury note was yielding 0.230%, compared with 0.211% on Thursday.

The 2-year hit its highest yield since June 8, 2020 on Thursday and the 30-year saw its largest yield slide in two months.

For the week, the 10-year Treasury is up 3.8 basis points, the 30-year shed 4.7 basis points, while the 2-year is up 7.9 basis points for the week.

Drivers for the Treasury market

In an interview on CNBC on Friday, Bullard said it was “natural” for the Fed to tilt hawkish at its meeting earlier this week given recent strong inflation readings.

He suggested that he would be inclined to see the Fed lift interest rates by late 2022 and said that Fed Chairman Jerome Powell has effectively opened the door to tapering the central bank’s monthly purchases of $120 billion in Treasurys and mortgage-backed securities.

Comments from Bullard, who is not currently a member of the rate-setting Federal Open Market Committee, though an influential member, resulted a brief bounce for Treasurys.

The Fed officials comments come days after the FOMC held its policy interest rate steady and made no change to its asset buying program on Wednesday, but also signaled an interest rate rise sooner than expected, with its forecasts suggesting two increases in 2023. And the Fed lifted its inflation forecasts for this year and next.

Analysts said trading in Treasurys were unusual, given the Fed’s expectations for hotter and more persistent inflation, but some said that moves were likely driven by bearish short positions and the perception that fixed-income investors were reducing their own expectations for hotter inflation now that the Fed is tilting toward tightening monetary policy.

Yields at the back end of the curve fell sharply on Thursday, with the 10-year Treasury hitting a rate of around 1.444%, according to FactSet data, before recovering somewhat.

What strategists are saying

“Stunning move in the US yield curve yesterday,” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities.

“With the slightly more hawkish tone from the Fed, many of the themes that worked for a big part of the repricing earlier in the year, were brought front and center,” he wrote.

By: Mark DeCambre