U.S. Treasury yields rose on Wednesday with traders focused on the expected minutes of the most recent Federal Reserve meeting for clues on the pace and scope of the Fed’s plans to reduce its bond holdings.
Fed Governor Lael Brainard said on Tuesday she expects rapid reductions to the Fed’s balance sheet and that the process could start in early May, sending yields on the 2-, 5– and 10-year Treasuries to multiyear highs, while helping reverse last week’s inversion of the 2-10 yield curve.
The Fed’s recent rate hike, and market expectations for more, mainly affect the short end of the curve, while selling duration held in the U.S. central bank’s balance sheet would pressure yields higher on the long end.
Wednesday’s move higher in yields “is a continuation from yesterday when (yields) reacted to Governor Brainard’s comment about a rapid unwind of the balance sheet. I think that phrasing took the market a little bit by surprise,” said Lou Brien, market strategist at DRW Trading in Chicago.
Brien said he expects the recent steepening on the 2-10 curve to reverse.
“The trend we’ve seen is going to continue. The balance sheet is going to be a more technical trade based on how they unwind it, but on the longer run the rate hikes are going to call the tune for the 2-10,” Brien added.
The Fed is due to release minutes of its March meeting at 2 p.m. Washington time (1800 GMT). On that meeting, the U.S. central bank raised rates for the first time since 2018 and pivoted from an easy policy to battle the effects of the coronavirus pandemic to a more aggressive stance on fighting inflation.
The yield on 10-year Treasury notes was up 7.4 basis points to 2.628 per cent while the 2-year note yield was up 2 basis points at 2.524 per cent, leaving the 2-10 curve at 10.12 basis points, after starting the week inverted.
The yield on the 30-year Treasury bond was up 7.8 basis points to 2.660 per cent after touching 2.68 per cent, its highest since May 2019.
The break-even rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 3.27 per cent, after closing at 3.262 per cent on Tuesday.
The 10-year TIPS break-even rate was last at 2.857 per cent and the U.S. dollar 5-years forward inflation-linked swap, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.623 per cent.
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