U.S. Treasury yields rose to almost two-week highs on Wednesday ahead of a speech later in the week by Federal Reserve Chair Jerome Powell that will be scoured for any new clues on when the U.S. central bank is likely to begin paring bond purchases.
The move higher may have been exacerbated by algorithmic traders selling Treasuries after the 10-year yields broke above their 200-day moving average. Powell will speak virtually on Friday at the Fed’s annual economic symposium at Jackson Hole, Wyoming.
Traders will be watching to see whether Powell expresses fresh concerns about the spread of the Delta coronavirus variant after Dallas Fed President Robert Kaplan -- among the U.S. central bank's most forceful advocates for starting to reduce support for the economy --- said on Friday he may need to adjust that view if the coronavirus slows economic growth materially.
“Following Kaplan’s well-timed comments on his openness to a later taper if Delta weighs on growth, the presumed likelihood that Powell errs toward dovishness has gone up, leaving the risk of a modest hawkish surprise if he doesn’t,” Jonathan Cohn, a trading strategist at Credit Suisse, said in a report.
Minutes from the Fed's July meeting released last Wednesday showed that the bulk of the U.S. central bank's policy-setting committee expect the Fed will start trimming its bond-buying program later this year, though consumer sentiment and economic data have weakened since then. Data on Wednesday showed that new orders for key U.S.-made capital goods were steady in July, while an acceleration in shipments suggested business investment in equipment could offset an anticipated slowdown in consumer spending and keep the economy on a solid growth path in the third quarter.
In choppy trading, benchmark 10-year yields gained six basis points to 1.347%, the highest since Aug. 13, and above the 200-day moving average of 1.326%.
“Once that broke, there could have been some algorithmic trading activity that pushed us a few basis points higher,” said Ben Jeffery, an interest rate strategist at BMO Capital Markets in New York. Breakeven inflation rates on five-year Treasury Inflation-Protected Securities (TIPS) also rose to 2.53%, from 2.49% late on Tuesday.
Low liquidity with many traders out for August vacations was seen as adding to market volatility. The Treasury sold $61 billion in five-year notes to average demand on Wednesday, the second sale of $183 billion in short and intermediate-dated supply this week. The notes sold at a high yield of 0.831%, close to where they had traded before the sale.
The government saw strong demand for a $60 billion auction of two-year notes on Tuesday. It will also sell $62 billion in seven-year notes on Thursday. Five-year note yields rose three basis points on the day at 0.824% in the secondary market. The Fed also saw a record $1.15 trillion in demand for its reverse repurchase agreement facility on Wednesday as money market investors continued to struggle with a dearth of safe short-term assets to buy.
Demand was also driven by Government-Sponsored Enterprises (GSEs) such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank System, which each month temporarily park principal and interest from mortgage-backed securities (MBS) in the market.
© 2021 Thomson/Reuters. All rights reserved.