A rally in U.S. Treasuries sparked by concerns over the Omicron coronavirus variant cooled on Tuesday as the market perceived testimony by Federal Reserve Chair Jerome Powell before a U.S. Senate committee as hawkish, sending yields higher and curves flatter.
The benchmark 10-year note yield, which fell to its lowest level since Sept. 24 at 1.412%, was last down 8.3 basis points at 1.446%. The 30-year yield, which dropped to its lowest since late January at 1.776%, was last 8.6 basis points lower at 1.7938%.
Yields move inversely to prices. The shorter end of the curve reversed course and rose with the two-year yield, which reflects short-term interest rate expectations, last up 1.4 basis points at 0.5236%.
As a result, a closely watched part of the curve that measures the gap between yields on two- and 10-year Treasury notes fell as low as 90 basis points.
Ben Jeffery, an interest rate strategist at BMO Capital Markets in New York, pointed to Powell's comments about abandoning the transitory characterization of inflation and discussing ending the central bank's bond purchases sooner as the catalyst for the market moves. "Powell came off as much more hawkish than many were assuming given the variant risk," Jeffery said.
"The fact that yields across the curve moved higher, led by the front end and belly, kind of speaks to that kind of assumption of more aggressive normalization maybe a little bit sooner than previously expected," he added.
Earlier in the session, yields across the curve tumbled after Moderna's CEO told the Financial Times that present vaccines would likely be less effective against the new variant and that it would be a risk to completely shift production to an Omicron-targeted dose while other variants remained in circulation.
The five-year note and 30-year bond yield curve also flattened. The gap between the two was last 5.7 basis points narrower at 64.60 basis points. The five-year breakeven inflation rate tumbled to a one-month low of 2.83% as Powell testified.
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