Government bonds slumped Tuesday, unwinding much of their recent rally, after a trio of Federal Reserve officials emphasized that the central bank has more work to do to get inflation under control.
Investors sold short- and long-dated Treasurys, sparking a jump in yields, which rise as bond prices fall. The yield on the 10-year Treasury climbed to 2.74%, from 2.605% at Monday's settlement. The two-year Treasury yield rose to 3.077%, up from 2.909% Monday
The yield on a Treasury bond largely shows how investors think the Fed will tend to set target short-term interest rates over the bond's life. Yields had fallen last week after Chairman Jerome Powell said in a press conference that the Fed will respond flexibly to forthcoming economic data. Many investors read that as a sign the Fed was less locked in to an aggressive series of inflation-fighting rate increases as the economy cools, sending rate expectations lower.
Tuesday, however, brought a different sentiment from Fed governors Loretta Mester, Mary Daly and Charles Evans. Each made remarks that previewed an unrelenting anti-inflation stance from the Fed.
Ms. Daly said that a pivot to rate cuts next year "is not my modal outlook." Markets have been betting the Fed could start to cut rates in 2023.
"The outlook I think is most likely, is really that we raise interest rates and then we hold them there for a while at whatever level we think is appropriate," she said.
In separate appearances, Ms. Mester and Mr. Evans backed up that take. Mr. Evans said that that the Fed's next meeting in September could bring a 0.75-percentage-point rate increase, suggesting an opening for a more aggressive move than the 0.5-percentage-point hike that futures markets now think most probable.
"We have more work to do because we have not seen that turn in inflation," Ms. Mester told the Washington Post.
Inflation and recession concerns are jockeying for space in investors' psyches, and on Tuesday, inflation was reclaiming ground as the prime focus, said Andy Brenner of NatAlliance Securities.
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August 03, 2022 at 03:50AM
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