U.S Treasury Yields Touch 2-Year High
Following Fed’s and furious hawkish poise, the 10-year U.S Treasury yields rose 5.4 basis points to almost 1.79% intraday, touching its highest intraday level since January 2020.
The minutes from the December meeting of the Federal Open Market Committee showed the central bank believed the time to begin removing policy accommodation was near and that policymakers favour interest rates over balance-sheet reduction as the primary tool.
Today, U.S stocks were mixed in choppy trade as a disappointing jobs report underscored the impact of the omicron variant on the economy and the challenges that the Federal Reserve faces in taming red hot inflation.
The Nasdaq Composite dropped 0.6% to 14,996.51 after midday on Friday. S&P 500 was down 0.1% at 4,691.86. The Dow Jones Industrial Average climbed 0.3% to 36,347.44 after declining earlier in the session.
The rotation into value-oriented areas continued as energy and financials led gainers while technology and communication services sectors were among the steepest decliners.
The 10-year US Treasury yield rose 5.4 basis points to almost 1.79% intraday, touching its highest intraday level since January 2020 with Fed hawkish poise driving rates higher, according to market analysts.
With the brunt of omicron coming in the latter half of December, the full impact of the surge in COVID-19 cases on hiring and participation isn’t likely captured in the December numbers, suggesting further weakness could lie ahead in January, according to a research note from Stifel.
“For the Fed, the latest read on the labour market reinforces the need for policymakers to strike a delicate balance,” Stifel chief economist Lindsey Piegza said.
“Yes, the [Federal Open Market] Committee wants to quell inflation and rein in inflation expectations, but monetary policy members are also aware of the still-fragile nature of the economy.”
Moody said in a note that there were clear signs of concerns about inflation in the minutes, raising the odds of an earlier and faster increase in the target range for the fed funds rate.
There was a lot of discussion about reducing the balance sheet, but no consensus on either the timing or procedure, according to the global rating agency.
it said The Fed has thrown in the towel on “transitory” inflation, scrubbing the word from both the post-meeting statement and minutes. Fed officials feel more comfortable about reducing the size of the balance sheet this time around, having learned from the process in 2017 and 2018.
Last time, the Fed waited two years between the first rate hike and reducing the balance sheet. That won’t happen this time around. The minutes show support for reducing the balance sheet around the time of the first-rate hike.
“This challenges the Fed’s efforts to divorce its interest rate and balance sheet policies. The Fed has a few more meetings in which to iron out the details of how it wants to reduce its balance sheet, but it does appear that it will use caps again.
“It doesn’t need a new playbook. The one used last time to shrink the balance sheet will still work, it will just move more quickly and begin shortly after the first rate hike.
“The runoff this time will be faster, as the Fed is more comfortable with the process, having done it before. This time the Fed has set up a backstop in the Standing Repo Facility.
“This is protection against the central bank overdoing it on quantitative tightening because the New York Fed conducts daily overnight repo transactions under a Standing Repo Facility to support the effective implementation of monetary policy and smooth market functioning”, Moody explained. #U.S Treasury Yields Touch 2-Year High
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