TREASURIES-10-year yields hit 5-month high as Fed rate cut hopes fade

BY Reuters | ECONOMIC | 04/16/24 02:18 PM EDT

(Updates as of 2 pm ET)

By David Randall

NEW YORK, April 16 (Reuters) - Benchmark U.S. 10-year Treasury yields climbed to five-month highs on Tuesday as markets reevaluated how quickly the Federal Reserve may move to cut interest rates this year given signs of strength in the global economy.

Fed Chair Jerome Powell said in an appearance Tuesday that the central bank may need to keep rates higher for longer than previously thought and that "it's likely to take longer than expected to achieve that confidence" that inflation is falling toward the Fed's 2% target.

In what has come to be known as the Fed's higher-for-longer stance, Powell added that "If higher inflation does persist, we can maintain the current level of restriction for as long as needed."

Futures markets are now pricing in a total of 42 basis points in rate cuts by the end of the year, down from 48 on Monday and a steep drop from more than 160 basis points in cuts expected at the start of January.

Powell's comments followed those of Federal Reserve Vice Chair Philip Jefferson earlier in the day, who signaled in a speech that an imminent interest rate cut will not be forthcoming if inflation persists.

"If incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer," Jefferson said at a Fed research conference. "I am fully committed to getting inflation back to 2%."

San Francisco Federal Reserve Bank President Mary Daly said late on Monday that there is "no urgency" to cut rates considering the continued resilience in the labor market and the U.S. economy. A report on Monday showed March retail sales were more than double analysts' expectations, helping to push Treasury yields higher.

Treasury yields move in the opposite direction to prices.

"The worst thing to do is act urgently when urgency is not required," Daly said at the Stanford Institute for Economic Policy Research.

Bullish Treasury market investors have had little to point to since last week's hotter than expected inflation data, increasing the market's attention on Fed speakers, said Lawrence Gillum, chief fixed income strategist for LPL Financial.

"There's been no one willing to stand in front of this momentum which means that yields are likely headed higher still," Gillum said.

Faster-than-expected growth in the Chinese economy in the first quarter will likely continue to put pressure on Treasuries as investors fear a reacceleration in inflation, said Ipek Ozkardeskaya, senior analyst at Swissquote.

The world's second-largest economy grew 5.3% in January-March from the year earlier, official data showed, comfortably above a 4.6% forecast from analysts in a Reuters poll and up from the 5.2% expansion in the previous quarter.

"Provided that the economic growth and jobs market remain robust and inflation is heating up, the idea that the Fed's next move will be a rate hike starts cooking in many investors' minds," Ozkardeskaya said.

The yield on 10-year Treasury notes was up 4.6 basis points to 4.674%, its highest level since Nov. 13. The yield on the 30-year Treasury bond was up 2.9 basis points to 4.769%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 5.3 basis points at 4.991%, slightly below its five-month high hit on April 11.

(Reporting by David Randall; Editing by Franklin Paul, Chris Reese and Nick Zieminski)

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