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Bond Report: 2-year Treasury yield continues to rise after Fed’s Powell says its appropriate to move ‘more quickly’ to tighten policy

Treasury yields extended their rise early Friday, a day after Federal Reserve Chairman Jerome Powell affirmed a half-point rate increase was on the table in May with possibly more to come in future meetings.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.933%

rose to 2.937%, up from 2.917% at 3 p.m. Eastern on Thursday, which was its highest since Dec. 4, 2018, according to Dow Jones Market Data. Yields and debt prices move opposite each other.

The 2-year Treasury yield
TMUBMUSD02Y,
2.738%

was 2.751% versus 2.693% Thursday afternoon, the highest since Dec. 17, 2018.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.943%

rose to 2.952%, up from 2.932% late Thursday.

What’s driving the market?

Yields rose sharply on Thursday, extending a rise after Powell, speaking in a panel discussion at an International Monetary Fund event, said “50 basis points will be on the table” at the May meeting. Several top Fed officials had previously indicated such a half percentage point move, rather than the typical quarter-point increment, was likely in May.

Read: Fed chief Powell backs moving more quickly on interest-rate hikes

Market participants had already largely priced in a half-point move in May. Powell appeared open to continuing a rapid pace of monetary tightening.

“It is appropriate in my view to be moving a little more quickly,” Powell said.

“I also think there’s something in the idea of front-end loading,” when moving away from the central bank’s easy-money policy, he said.

S&P Global’s preliminary reading of April private-sector manufacturing and services activity is due at 9:45 a.m. Eastern.

The manufacturing purchasing managers index, or PMI, is expected to edge down to 58.2 from 58.8 in March, while the services PMI is seen at 57.9 versus 58.0 in March, according to economists surveyed by The Wall Street Journal. A reading of more than 50 indicates growth in activity.

What are analysts saying?

Treasury yields “surged again on the idea of even more rate hikes, specifically that the Fed could hike 50 bps (basis points) in May, June and July,” said Tom Essaye, founder of Sevens Report Research, in a note.

“Bottom line, the Treasury market continues to play ‘catch up’ with expected rate hikes and now the market appears to pricing in 150 bps of hiking by the end of the July meeting, which is flattening the curve more. If the 10s-2s yield curve continues lower and re-inverts, that will reinforce the signal that the economy is likely headed for a future slowdown, one likely less than a year away,” he wrote.

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