The 2-year U.S. Treasury yield on Tuesday rose to its highest level since July 2007 as investors assessed comments from Federal Reserve Chairman Jerome Powell who said the central bank may need to increase the pace of interest rate hikes again.
The 2-year Treasury yield hit a high of 4.968% soon after Powell’s remarks, reaching its highest level since 2007. It was last trading more than 7 basis points higher at 4.97%.
Meanwhile, the yield on the benchmark 10-year Treasury dipped nearly 4 basis points at 3.944% after briefly topping the key 4% level earlier in the session.
Yields and prices have an inverted relationship. One basis point equals 0.01%.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in remarks prepared for two appearances this week on Capitol Hill.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell added.
The Fed chair’s comments suggested to investors that the terminal level of the federal funds rate could be higher than previously indicated, and that investors could expect a rate hike that is possibly larger than the most recent 25 basis point increase at the central bank’s next policy meeting.
2-year Treasury yield
Still, some investors found the comments unsurprising as the Fed continued to fight inflation in a campaign that included eight consecutive interest rate hikes since March 2022.
“While some market participants might have been caught off guard by Powell’s comments, the reality is that he is largely affirming what the bond market has already priced in,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.
“The terminal level for policy rates will be slightly higher than previous expectations as the timing of an economic slowdown has been pushed further…
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