By: Gertrude Chavez-Dreyfuss

U.S. Treasury yields rose on Thursday, in line with those on UK bonds, as investors focused on hawkish comments from Federal Reserve Chair Jerome Powell that suggested interest rates could go higher still as the central bank still has a long way to go in bringing down inflation to its 2% target. Earlier, the Bank of England raised interest rates by a bigger-than-expected half a percentage point to 5%, the highest since 2008 and its largest rate increase since February, following stubborn inflation and wage growth.

“Typically when you see a move like that, even though it’s not centric to the U.S., you can get spillover into other markets. I think that’s part of the backup today in yields,” said Gregory Faranello, Head of U.S. Rates, at AmeriVet Securities in New York. “In general, we have leaned slightly bearish here, meaning higher yields. Powell’s theme has been pretty consistent that the committee sees two more rate hikes. It’s definitely possible the Fed pushes higher here and so we’re leaning toward a higher terminal rate,” he added.

Powell, in testimony on Wednesday before the U.S. House Financial Services Committee, said further Fed rate increases are “a pretty good guess” of where the central bank is heading if the economy continues in its current direction. In response to a question late in a hearing, he noted that a majority of policymakers see two more quarter-point rate increases as likely by year-end. The Fed Chair also testified Thursday on the economy before the Senate Banking Committee. The more closely-watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes reduced its inversion on Thursday to -98.60 basis points (bps), suggesting investors expect further rate tightening from the Fed. Earlier, that gap widened to -101.30 bps, the deepest inversion since March.

In late morning trading, the yield on 10-year Treasury notes was up 5 bps at 3.773%. U.S. 30-year bond yields were up 4.5 b ps at 3.853 %. U.S. two-year yields, which typically reflect interest rate expectations, rose 5.2 bps to 4.759%. U.S. yields also rose amid what analysts described as a “mega” Nasdaq corporate bond issue, with maturities across the curve. Wall Street dealers typically looked to lock in borrowing costs for corporate bonds they are underwriting. As part of that process, a dealer sells Treasuries as a hedge to lock in the borrowing cost on the bond issue before the deal is completed. Once the bond is sold, the dealer buys Treasuries to exit the “rate lock.”