Hawkish remarks from Fed officials cause Treasury yields to rise

Several Federal Reserve officials signaled on Tuesday that the U.S. central bank has engaged in its aggressive fight against soaring prices, pushing short-term Treasury yields higher as investors anticipate more interest rate hikes. interest.

The two-year yield, which moves with interest rate expectations, jumped 0.2 percentage points to 3.08%, its biggest daily move since mid-June. The three-year yield rose 0.23 percentage points, also its biggest move since mid-June, to above 3%.

San Francisco Fed President Mary Daly said in a LinkedIn interview that the central bank is “far from” over its fight against inflation, which continues to hit 40-year highs.

His remarks come after the Fed’s meeting last week where Chairman Jay Powell suggested it might be appropriate to slow the pace of interest rate hikes, prompting a rally in markets.

In a separate interview on Tuesday, Chicago Fed President Charles Evans said he thought a 0.5 percentage point hike at the next meeting in September would be appropriate. However, he left the door open for a bigger hike of 0.75 percentage points, which he said “could also be acceptable.”

Subadra Rajappa, head of US rates strategy at Societe Generale, said Daly’s comments had “triggered” selling in the US Treasury market, where yields move inversely to prices. “It’s hard to know. . . if the market just overreacts,” Rajappa added.

Tom Simons, money market economist at Jefferies, said Evans “tends to be very dovish, so this hawkish rating is important.”

After the Federal Open Market Committee meeting, investors had begun to anticipate a series of small rate hikes later this year as the Fed’s aggressive monetary tightening began to cool the US economy.

But Daley and Evans’ comments stirred futures markets, with expectations for the Fed’s benchmark benchmark rate position in December rising from 3.27% on Monday to 3.39% on Tuesday.

The Fed’s comments come after the Commerce Department announced last week that the U.S. economy had contracted for a second consecutive quarter, meeting one of the common criteria for a recession. It contracted 0.9% on an annualized basis in the second quarter, after contracting 1.6% in the first three months of 2022.

Investors have also warned that liquidity in the Treasury market – the ease with which traders can buy and sell – is poor, with many market participants on vacation this month. A deterioration in liquidity may lead to strong fluctuations in the price of the securities.

Elsewhere, U.S. stocks were mixed on Tuesday as Nancy Pelosi’s arrival in Taiwan stoked tensions between the U.S. and China.

Wall Street’s S&P 500 stock index fell 0.3% after oscillating between small gains and losses throughout the day. The tech-heavy Nasdaq Composite rose 0.2%. Europe’s Stoxx 600 fell 0.3%, while the broad MSCI index of Asia-Pacific stocks fell 1.3%.

China has said it will increase military activity around Taiwan after the Speaker of the House of Representatives became the highest-ranking US official to visit the territory in decades.

Several Chinese fighter jets have flown near the midline that divides the Taiwan Strait, while Russia has accused the United States of “provoking” Beijing.