- The US 10-year treasury yield is back above 1.60% as yields rise after Powell’s renomination, two bad auctions.
- The rally in yields was led by a move higher in real yields as investors dumped inflation protection.
US bond yields rose sharply on Monday, with the rise initially spurred by the news that Jerome Powell had been renominated for a second term as Chairman of the Fed, but then exacerbated by two poor US government bond auctions. US 10-year bond yields were last up nearly 9bps on the session to 1.62%, with yields now back to their highest levels since last Wednesday and now only about 3bps below last week’s highs at 1.65%. Medium-term bond bears will want to see the 1.65% level broken, opening the door to a move back towards annual highs set back in mark of close to 1.77%.
In terms of the rest of the curve, 2-year yields were up just shy of 8bps on the day to 0.58%, their highest since March 2020. 5-year and 7-year yields were up more than 10bps each to above 1.30% and just under 1.55% respectively, with both hitting highs since February 2020. The 30-year yield was up 7bps to 1.97%. The move higher was led by real yields, with the 5-year TIPS yield up 14bps to above -1.70% (marking a more than 20bps rally in the last two sessions) and the 10-year TIPS yield up 13bps on the day to just under -1.0%.
The comparatively larger drop in real versus nominal yields meant that inflation expectations on Monday fell. 5-year breakevens, which were as high as 3.31% last Tuesday, are now down just over 3bps on the day to 3.06%, while 10-year breakevens fell back to 2.60%, now 15bps below last week’s highs.
Hawkish reaction to Powell renomination
US bond markets reacted hawkishly to the news of Fed Chair Jerome Powell’s renomination for the second term as Fed Chair. This is not so much because Powell is viewed as a hawk, but more so because Lael Brainard, who was the main alternative contender for the position, is seen as much more dovish than Powell. A Fed headed by Brainard would essentially be expected to keep rates lower for longer, so the hawkish market reaction is mostly about pricing out this dovish risk.
Fed funds futures for next December fell by 8.5bps to 99.285, meaning that three full 25bps rate hikes are now nearly priced in by the end of 2022. According to analysts at TD Securities, Powell’s nomination “provides a little bit more legitimacy to market pricing in terms of Fed tightening next year”. The comparatively large spike in real yields is indicative of an easing of inflation fears, with investors opting to sell the inflation protection provided by TIPS amid greater confidence a Powell-led Fed will fulfill its medium-term inflation mandate.
With sentiment in bond markets already on the rocks amid hawkish Fed bets, poor demand at two key auctions further shook-up sentiment. A $58B sale of 2-year US government paper saw the high yield come in at 0.623%, more than 1.1bps above the When Issued, the biggest such tail since February 2020 at the start of the Covid-19 crisis phase. Meanwhile, a $59B auction of five-year government notes tailed by 1bps and saw primary dealers take up the largest percentage of any 5-year sale since February.