Treasury Curve Steepens on Powell’s Latest Bond-Buying Signal

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The Treasury yield curve steepened slightly Wednesday after the Federal Reserve Chair Jerome Powell, who signaled that it will keep rates near zero for at least three years, stopped short of tweaking bond purchases as some had expected.

Ten- and 30-year yields briefly spiked to session highs of 0.70% and 1.46%, respectively, during a press conference Powell held after the central bank’s latest policy decision. That caused the spread between 5- and 30-year yields, to widen slightly.

The central bank repeated it will continue buying Treasuries and mortgage-backed securities “at least at the current pace to sustain smooth market functioning.” In response to a question about the Fed’s asset-purchase program and guidance, Powell said the present stance is “appropriate,” but stressed officials are prepared to adjust it if needed, without getting into specifics.

Some traders have been expecting a signal regarding plans to target longer maturities in its purchases. As a result, long-bond yields rose and 30-year bonds underperformed interest-rate swaps, with the spread between the two tightening over one basis point.

Powell “did emphasize that purchases will continue at ‘at least’ the current pace, and noted that they could change the composition,” said Tom Garretson, a senior portfolio strategist at RBC Wealth Management. “Perhaps there was some chance that the market was looking for the pivot toward longer-dated Treasury purchases,” and the lack of that is one factor “driving modest curve steepening.”

Speed Limit

“So as long as the Fed is signaling that it’s at least thinking about thinking about doing more, that’s likely to be sufficient for markets, and will probably place a speed limit on further yield-curve steepening,” he said.

Market-based measures of inflation expectations also rose marginally, signaling some traders may be slightly more optimistic about the Fed’s chances of achieving its inflation goals.

“Curve steepening will continue” and “breakevens will continue to move higher,” said Nick Maroutsos, a money manager at Janus Henderson Investors.

— With assistance by Liz McCormick, and Stephen Spratt

( Updates with comparison with interest-rate swaps in fourth paragraph)