U.S. bond yields edge lower ahead of Powell’s Jackson Hole speech

U.S. bond yields edged down on Thursday, giving back some of the previous session’s spike, as traders continued to eye Federal Reserve policy chatter from the looming Jackson Hole meeting.

What’s happening
  • The yield on the 2-year Treasury
    slipped 1.2 basis points to 3.380%.

  • The yield on the 10-year Treasury
    retreated 2 basis points to 3.088%.

  • The yield on the 30-year Treasury
    fell 1 basis point to 3.306%.

The 10-year to 2-year spread of minus 29.2 basis points means the yield remains inverted, signaling an economic downturn.

What’s driving markets

“All attention is on what Fed Chair Powell might say tomorrow at the Jackson Hole symposium in Wyoming,” said Henry Allen, strategist at Deutsche Bank.

He noted that benchmark bond yields had spiked in the previous session, taking U.S. and German 10-year yields to near their highest levels since late June, after U.S. economic data was a bit stronger than expected and surging European energy costs raised concerns about additional inflationary pressures on the continent.

“Given the U.S. faces a more favorable situation on the energy side, the moves in central bank pricing weren’t as pronounced as in Europe yesterday. But the peak rate priced in by Fed funds futures for March 2023 still rose +3.5bps on the day as investors continued to adjust their policy expectations closer towards the more hawkish rhetoric from FOMC officials,” Allen added.

These moves are being partially reversed on Thursday, with yields nudging a touch lower, even though a fresh report showed German GDP grew by 0.1% in the second quarter against forecasts for a flat reading.

Markets are pricing in a 56.5% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.00% to 3.25% after its meeting on September 21st. The central bank is expected to take its borrowing costs to 3.74% by April 2023, according to Fed Funds futures.

Some analysts speculated that the market may have overdone its expectations that Powell would reiterate his hawkishness by implying hefty rate hikes, such as another 75 basis points, are likely.

“Of course, Powell may not be so willing to get into his specific preferences for September, instead deferring as always to the upcoming data,” said Jan Nevruzi, U.S. rates strategist at NatWest Markets.

This wait-and-see approach is favored by Atlanta Fed president Raphael Bostic. In a Wall Street Journal interview president Bostic said that he hadn’t decided on whether the Fed should increase interest rates by 50 basis points or 75 basis points at its policy meeting next month and would want to scan upcoming inflation and employment data before making up his mind.

U.S. economic reports on the slate Thursday include weekly initial jobless claims and the second reading of second-quarter GDP data, both due at 8:30 am Eastern. The Kansas City Fed manufacturing index is due at 11 am Eastern.

The U.S. Treasury will auction $37 billion of 7-year bonds on Thursday.

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