Two-year yields gain, long-dated Treasuries mixed after Powell speech

NEW YORK, Aug 26 (Reuters) –  two-year Treasury yields briefly popped to their highest levels since October 2007 before stabilizing near two-month highs on Friday after Federal Reserve Chair Jerome Powell reiterated that the  central bank will continue to raise interest rates to fight inflation.

Powell, in a closely watched speech at the Fed’s Jackson Hole conference, said investors should not expect the central bank to reduce interest rates until inflation is tamed.

“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said.

The two-year Treasury yield, which typically moves in step with interest rate expectations, was up 2.9 basis points at 3.403%, slightly below its high for the year of 3.4350% in June.

The rise in short-term interest rates further inverted the yield curve, which is often seen as a signal of an upcoming recession. The closely watched gap between yields on two- and 10-year Treasury notes was at -37.0 basis points, compared with -31.3 basis points before Powell’s speech.

The yield on 10-year Treasury notes was up 0.9 basis point to 3.033%. The yield on the 30-year Treasury bond was down 2.7 basis points to 3.207%.

Yields rise as bond prices fall.

“Powell’s comments were remarkably in line with market expectations,” said Ian Lyngen, head of rates strategy at BMO Capital Markets. “Overall, the response is well within the recent range in nominal terms, even if the curve appears biased to break out lower.”

August 26 Friday 1:55PM New York / 1755 GMT

(Reporting by David Randall;
Editing by Chizu Nomiyama, Nick Zieminski and Leslie Adler)