Investors hoping for action from Federal Reserve Chair Jerome Powell to address recent turmoil in the Treasury market were left disappointed.
Powell told a Wall Street Journal forum on Thursday that the Fed remained committed to keeping monetary conditions loose until more Americans are back to work. His comments, likely the last before a press conference on March 17 following the Fed’s next policy meeting, brushed off concerns that a recent move up in U.S. Treasury yields might spell trouble for the Fed as investors push up borrowing costs the central bank wants to keep low.
Yields on Treasury debt rose after Powell signaled the central bank would make no immediate move to cap the recent increase in yields. The benchmark 10-year yield was last at 1.552%, up 8.2 basis points on the day.
“Overall I think the Powell speech was a disappointment for the markets. While I didn’t think he said anything wrong, the market was looking for more, looking for more liquidity and they’re not going to get it,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
“We’re going to see higher rates because of it.”
While Powell said the increase was “notable and caught my attention,” he did not consider it a “disorderly” move, or one that pushed long-term rates so high the Fed might have to intervene in markets more forcefully to bring them down, such as by reweighting its $120 billion in monthly bond purchases, a policy tool known as Operation Twist.
“Maybe the markets wanted firmer guidance,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “But this is the best he can do.”
Operation Twist, in which the central bank shifts bond purchases to the long end of the yield curve, was used in the early 1960s, when the Fed sold shorter-dated debt to buy longer-dated debt to help lift the United States out of a recession. It was also used in 2011 when the Fed, which had already anchored shorter-dated debt by holding interest rates at zero, used asset purchases to lower long-term rates.
But there are obstacles to Fed intervention.
“The absolute level of real yields is still quite low,” said Erin Browne, portfolio manager at Pimco. “Yes, there was a mini sell-off. But from the Fed’s perspective, when you look at financial conditions … they were basically unchanged for most of last week.”
Though rising yields can increase the cost of borrowing for companies and individuals, the recent trend reflects an improving economic outlook, possible evidence the Fed’s policy is working. The 10-year Treasury yield hit a one-year high of 1.614% last week.
Powell’s comments on Thursday largely echoed the message from Fed Governor Lael Brainard on Tuesday, who, noting the rise in yields, said she would be concerned if she saw disorderly conditions or persistent tightening in financial conditions.
“We think Powell is playing more of a long game. Markets need to see the Fed’s resolve. Powell realizes the best he can do it just keep reiterating that resolve,” said Tom Graff, head of fixed income at Brown Advisory.
More upwards pressure on yields is likely to come from the U.S. Treasury’s issuing approximately $4 trillion in government debt in 2021, according to ING Bank. The Fed’s monthly purchases currently total $120 billion.
“If the Fed doesn’t do something, then it’s only a matter of time, because the supply just keeps coming,” said Patrick Leary, chief market strategist and senior trader at broker-dealer Incapital.
Still, high demand from foreign investors due to the relative attractiveness of U.S. debt could eventually cap the rise.
“I think once you get to 1.75% or 2% level, there is going to be pretty chunky demand. So that will keep the back end contained,” said Pimco’s Browne.