That view was rattled by the latest inflation figures, which showed the biggest year-on-year surge in consumer prices since 1990. A bond-market gauge of expected inflation jumped to a record high. The rout was further fueled by a weak auction of 30-year Treasuries, as yields climbed back near levels seen ahead of Powell’s remarks.
“This is a market now that’s having a lot of trouble handling risk, and a 30-year auction is a lot of risk,” said Michael Cloherty, head of U.S. rates strategy at UBS.
The selloff in Treasuries reverberated around the world’s bond markets. Australian 10-year yields rose as much as 13 basis points to 1.86% on Thursday morning, while similar-dated German bund yields rose 5 basis points Wednesday to minus 0.25%.
Still, the jump in Treasury yields didn’t appear to herald a major reconsideration of the Fed’s approach to monetary policy, and other sell-offs have been short-lived as investors came in and bought the dips.
Rate Hike Bets
Money-market traders moved forward their bets for the Fed’s first hike by two months to July, although they’re only pricing in about two quarter-point increases in 2022, signaling little concern the bank will find itself fighting against runway inflation.
Swaps futures for other major markets signaled a revival in expectations for hikes, with Canada now seen raising rates by more than 1 percentage point within a year and even the European Central Bank expected to hike in that timespan.
George Goncalves, head of U.S. macro strategy at MUFG Securities Americas, expects some calm to return as investors recalibrate their outlook, but that volatility is likely to be high.
“We are finding out that we cannot ignore this inflation problem,” Goncalves said. “Risks are growing that rates will become more volatile and potentially heading higher ahead, just not in one go. It was a shot across the bow.”
Yields across much of the U.S. curve leaped more than 10 basis points on the day, with those in the so-called belly — around 5-to-7 years — seeing the biggest jumps. The dollar gained 0.9%, the biggest advance since December.
The jump in yields also drove up a closely watched bond-market gauge of expected inflation as investors poured into Treasury inflation-protected securities. The so-called five-year breakeven rate on those securities — or the difference between those yields and the ones on typical Treasuries — jumped as much as about 14 basis points to around 3.13%, a record high.
“There’s a growing recognition that perhaps the Fed is moving too slowly,” said David Petrosinelli, senior trader at InspereX.
The $25 billion 30-year Treasury new-issue auction contributed to the pressure after it was awarded at 1.940%, well above the 1.888% when-issued yield at the 1 p.m. New York bidding deadline. After the results, 30-year yields jumped to as high as 1.96%, though they later dipped back around 1.90%.
The sale came after the consumer price index increased 6.2% last month from a year earlier, according to Labor Department data. It jumped 0.9% from September, the largest advance in four months. Both increases exceeded all estimates in a Bloomberg survey of economists.
Fed Chair Powell said last week that officials could be patient on raising interest rates — after announcing a start to reducing their bond purchases — but won’t flinch from action if warranted by inflation.
But Treasury Secretary Janet Yellen reiterated in an interview Tuesday on National Public Radio’s “Marketplace” show that she doesn’t expect the elevated inflation to persist beyond next year and said the Fed will act if needed to prevent a rerun of 1970s-style price rises.
The auction results also reflect the out-sized risk posed by 30-year bonds because of their high duration — a measure of how much bond prices fall with each notch higher in yield. Treasuries with a maturities of over 20 years were already down about 3.21% this year through Nov. 9, according to a Bloomberg index. That’s well above the approximately 1.8% drop for Treasuries overall.
“I’ve been in the market about 30 years now and this is one of the scarier ones I’ve seen,” said Jim Caron, portfolio manager at Morgan Stanley Investment Management with regard to the 30-year auction. “It highlights that the back end of the curve is wildly mis-priced.”