Treasuries Move Sharply Lower Amid Worries About Monetary Policy
Treasuries moved sharply lower during trading on Tuesday, extending the downward move seen over the two previous sessions.
Bond prices came under pressure in morning trading and remained firmly negative throughout the afternoon. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, surged 14.4 basis points to 2.556 percent.
With the substantial increase on the day, the ten-year yield reached its highest closing level in almost three years.
The steep drop by treasuries came amid renewed concerns about the outlook for monetary policy following comments from Federal Reserve Governor Lael Brainard.
Brainard described inflation as “much too high” during remarks at a Minneapolis Fed conference and predicted the Fed would start reducing its balance sheet at a “rapid pace” as soon as the May meeting.
“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery,” Brainard said in prepared remarks.
She added, “The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections.”
The Fed may provide additional clues about the outlook for monetary policy with the release of the minutes of its March meeting on Wednesday.
CME Group’s FedWatch tool is currently indicating a 77.7 percent chance the Fed will raise rates by 50 basis points next month.
In U.S. economic news, the Institute for Supply Management released a report showing U.S. service sector growth reaccelerated in the month of March.
The ISM said its services PMI rose to 58.3 in March from 56.5 in February, with a reading above 50 indicating growth in the sector. Economists had expected the index to rebound to 58.0.
The slightly bigger than expected increase by the services PMI follows three consecutive monthly decreases after the index reached a record high in November.
A separate report released by the Commerce Department showed the U.S. trade deficit was nearly unchanged in February, as imports and exports both increased.
The Fed minutes are likely to be in the spotlight on Wednesday, as traders look for further clues about how aggressively the central bank plans to tighten policy.
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