Treasury yields hold ground after Powell underlines gradual rate hike path

Treasury yields were mostly unchanged on Tuesday after Federal Reserve Chairman Jerome Powell, as expected, highlighted the need for a gradual pace of rate hikes in testimony on Capitol Hill.

His testimony comes after a rise in government bond yields on Monday was propelled in part by a report on retail sales for June that was better than expected, with improvements to prior monthly estimates highlighting domestic economic strength as reflected in improved consumer spending.

The 2-year note yield TMUBMUSD02Y, +0.80% gave up 1.2 basis points to 2.615%, a day after marking its highest yield since July 30, according to WSJ Market Data Group. The 30-year bond yield TMUBMUSD30Y, +0.29% shed 0.2 basis point to 2.964%, after its largest one-day yield jump since June 20. The 10-year Treasury note yield TMUBMUSD01Y, +0.44% edged up 0.2 basis point to 2.858%.

Bond prices move in the opposite direction of yields.

Meanwhile, the closely watched yield differential between 2-year and 10-year notes, a widely tracked measure of the yield curve, stood at 24.3 basis points or 0.243 percentage points, its narrowest level since 2007.

Powell’s testimony to the Senate Bank Committee proved uneventful as he highlighted the strength of the U.S. economy and his confidence that inflation would stay in check. The Fed chairman is due to appear before the House Financial Services panel on Wednesday.

Traders keyed into how Powell shrugged off the question of how the central bank would think about a potential inversion of the yield curve, or the condition in which short-term rates exceed their longer-term counterparts. A phenomenon that has been an accurate predictor of recessions. Analysts say Powell is unlikely to shift this hiking path based on the yield curve’s movements, but that it would remain one of many indicators he would watch.

The top U.S. central banker’s second appearance on Capitol Hill comes after the Fed raised benchmark rates in March and June, and as policy makers have penciled in two more interest-rate hikes for 2018. Markets expect the Fed to move in September and December.

Check out: Preview: Powell to defend pace of one interest-rate hike every three months

Of crucial importance to D.C. lawmakers is the outlook for the domestic economy amid tariff-related disputes, advocated by President Donald Trump’s administration, against trade partners in North America, Europe and Asia that many fear could ripple through global economies should they escalate further. Powell admitted trade wars would remain a risk to the U.S.’s economic prospects.

“The state of the debate is should the Fed be reacting to what the curve is doing. Or should they be following their own forecasts and let the chips fall where they may. My guess is Powell sits in the latter camp,” said Tom Graff, head of fixed income at Brown Advisory.

“I guess [Powell] is not that concerned about inversion or, more importantly, possibly he feels the Fed can do little to affect it. I totally agree with he can do little to stop inversion when he is inclined to lift rates gradually,” said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

Industrial production in June jumped by 0.6% to offset a similar decline in May. The increase was 0.1% above the consensus estimate from economists polled by MarketWatch. The data release highlights the economy’s strong momentum in the second-quarter, with a few analysts saying a 4% annual pace wouldn’t be unexpected.

Stocks climbed on the buoyant economic outlook presented by Powell. The Dow Jones Industrial Average DJIA, +0.22% was up by 0.3% and the S&P 500 index SPX, +0.46% was up by 0.5%.

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