Treasury yields stabilize as markets digest Fed’s ‘robust’ policy change

“The move by the Fed to look more toward inflation averaging was largely expected,” said Gregory Faranello, head of U.S. rates trading at AmeriVet Securities, in a note. “In our view, the more powerful change yesterday was on employment: looking at shortfalls rather than deviations. And with a strong notion of leaving no one behind.”

Treasury yields fell slightly on Friday as traders digested Federal Reserve Chairman Jerome Powell’s announcement of a major policy shift in regards to inflation. 

The yield on the benchmark 10-year Treasury note dipped one basis point to 0.73%. The 30-year bond yield traded slightly lower at 1.49%. Yields move inversely to prices. The benchmark 10-year yield hit a high of 0.75% during Thursday’s session, its highest level since June 17. 

Friday’s muted moves come after Powell said Thursday the U.S. central bank is willing to allow inflation to run hotter than normal, in an effort to support the labor market and broader economy. In other words, the Fed will allow inflation to run “moderately” above its 2% goal “for some time” after periods when it has fallen below that level. Powell also hinted that the U.S. unemployment rate can stay lower for longer before the central bank starts thinking about rate hikes. 

Powell described it as a “robust updating” of policy.

“The move by the Fed to look more toward inflation averaging was largely expected,” said Gregory Faranello, head of U.S. rates trading at AmeriVet Securities, in a note. “In our view, the more powerful change yesterday was on employment: looking at shortfalls rather than deviations. And with a strong notion of leaving no one behind.”

“The change toward the employment side of the Fed’s mandate is significant in our view,” said Faranello. “And just as the Fed leaned on shortfalls to inflation throughout 2019, we would look for a shift now to the employment side. Especially in light of the severe damage Covid has caused the American workforce.”

Thursday’s news led to a steepening in the so-called yield curve. While the longer-maturity rates jumped, the short-term 2-year rate hovered around its lowest levels since early August. 

On the data front, U.S. consumer spending rose 1.9% in July, topping a Reuters forecast of a 1.5% gain. Personal income was also stronger than expected, rising 0.4% while economists had forecast a drop of 0.2%.