TREASURIES-'Hawkish' Powell testimony dents rally

BY Reuters | ECONOMIC | 11/30/21 04:41 PM EST
    (Recasts, update yields, adds analyst comments and fed fund
futures)
    By Karen Pierog
    CHICAGO, Nov 30 (Reuters) - Testimony by Federal Reserve
Chair Jerome Powell on Tuesday struck a hawkish chord in the
U.S. Treasury market, pushing up shorter-term yields, which had
fallen earlier in the session as part of an across-the-curve
rally sparked by concerns over the Omicron coronavirus variant.
    Powell told a U.S. Senate committee the term "transitory" to
characterize inflation should probably be retired. He also said
the Fed should consider accelerating the tapering of its bond
purchases at its upcoming December meeting.
    The benchmark 10-year note yield, which fell to
its lowest level since Sept. 24 at 1.412%, was last down 8.5
basis points at 1.4443%. The 30-year yield, which
dropped to its lowest level since late January at 1.776%, was
last 8.5 basis points lower at 1.7951%. Yields move inversely to
prices.
    The shorter end of the curve reversed course and rose with
the two-year yield, which reflects short-term
interest rate expectations, last up 5.1 basis points at 0.5611%.
    A closely watched part of the curve that measures the gap
between yields on two- and 10-year Treasury notes
flattened, with the spread falling to as low as 87.80 basis
points.
    "Powell came off as much more hawkish than many were
assuming given the variant risk," said Ben Jeffery, an interest
rate strategist at BMO Capital Markets in New York, adding that
the market was thinking "a sooner end to tapering might imply a
sooner liftoff for rate hikes."
    Futures on the federal funds rate, which track
short-term interest rate expectations, on Tuesday priced in an
86% chance of a quarter-point tightening by the Fed by June, up
from 74% on Monday, with investors fully pricing in that rate
hike by July.
    John Canavan, lead analyst at Oxford Economics in New York,
said yields on the shorter end of the curve rose on heightened
interest rate-hike expectations, while long-end yields stayed
lower due to curve flattening trades, a risk-off sentiment that
sent stocks down, and demand from month-end portfolio
rebalancing.
     "Fed Chair Powell let us know that despite any concerns
they have about the variant, it's not enough to get them to
change the trajectory of their policy until we see some actual
significant economic impacts from the variant," Canavan said.
     Earlier in the session, yields across the curve tumbled
after Moderna's (MRNA) CEO told the Financial Times https://www.ft.com/content/27def1b9-b9c8-47a5-8e06-72e432e0838f
 that existing vaccines would likely be less effective against
the new variant and it would be a risk to completely shift
production to an Omicron-targeted dose while other variants
remained in circulation.
    The five-year note and 30-year bond yield
curve also flattened. The gap between the two was last 7 basis
points narrower at 63.30 basis points.
    The five-year breakeven inflation rate tumbled to a
one-month low of 2.79%..
    November 30 Tuesday 4:20PM New York / 2120 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.055        0.0558    0.003
 Six-month bills               0.1025       0.104     0.005
 Two-year note                 99-225/256   0.5611    0.051
 Three-year note               99-192/256   0.8358    0.024
 Five-year note                100-110/256  1.1612    -0.024
 Seven-year note               100-216/256  1.3731    -0.055
 10-year note                  99-92/256    1.4443    -0.085
 20-year bond                  102-68/256   1.8635    -0.076
 30-year bond                  101-216/256  1.7951    -0.085

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        23.50        -0.25
 spread
 U.S. 3-year dollar swap        22.75         0.00
 spread
 U.S. 5-year dollar swap        12.25         0.75
 spread
 U.S. 10-year dollar swap        7.25         2.25
 spread
 U.S. 30-year dollar swap      -16.00         1.50
 spread



 (Reporting by Karen Pierog and Tom Westbrook; additional
reporting by Dhara Ranasinghe, Yoruk Bahceli and Gertrude
Chavez-Dreyfuss; Editing by Barbara Lewis and Leslie Adler)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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