10- and 30-year Treasury yields advance to 3-year highs as investors assess Fed’s balance-sheet strategy

Gold closes out Thursday trade higher, aims for weekly gain

Yields on 10-year Treasury notes and 30-year Treasury bonds climbed to levels last seen in 2019 on Thursday, though rates were broadly mixed, as investors assessed Federal Reserve officials’ tentative plans to begin shrinking the central bank’s almost $9 trillion balance sheet.

The 2-year rate fell on the day, which steepened the spread between 2- and 10-year yields to as much as 22 basis points.

What are yields doing?
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    2.649%

    rose 4.8 basis points to 2.654% from 2.606% at 3 p.m. Eastern on Wednesday. That’s the highest level since March 6, 2019, based on 3 p.m. yields, according to Dow Jones Market Data.

  • The yield on the 30-year Treasury bond BX:TMUBMUSD30Y rose 5.7 basis points to 2.688% from 2.631% on Wednesday. That’s the highest since May 28, 2019.

  • The 2-year Treasury note yield
    TMUBMUSD02Y,
    2.510%

    declined 3.8 basis points to 2.462% versus 2.5% Wednesday afternoon.

What’s driving the market?

Long-dated yields continued to climb on Thursday, a day after minutes of the Federal Reserve’s March meeting were released.

The summary showed that Fed officials want to reduce the balance sheet by up to $95 billion a month after a three-month phase-in. The process could potentially begin in May, but policy makers have yet to make a final decision, the minutes said.

Policy makers also showed some support for half-point rate hikes at upcoming meetings if inflation remains high or gets even worse. Sales of the Fed’s mortgage-backed securities holdings also remained on the table, the minutes showed.

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Read: The Fed’s plan to rapidly slash its balance sheet is out. Here’s what happens to money in the system.

Data released on Thursday showed that initial jobless claims matched a 54-year low of 166,000 for the week that ended April 2 — the second lowest reading in history— during a period of remarkably strong hiring and the lowest layoffs on record. Meanwhile, total U.S. consumer credit soared $41.8 billion in February.

St. Louis Fed President James Bullard, who has been in the vanguard of Fed officials pushing for a more aggressive policy response, dismissed talk of recession on Thursday, saying that the U.S. expansion “is not ‘old’ and can continue for a long time.”

What are analysts saying?

“The Fed’s hasty normalization plans have a feeling of ‘behind the curve’ around them,” wrote analysts at KBC Bank, in Brussels. “Only one month ago, the Fed was still buying bonds on a net basis. In the previous [quantitative-tightening]-cycle, it took them one year to hit the maximum speed of $50bn/month.”

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