Two-year yield jumps after Powell remarks

NEW YORK, March 7 (Reuters) – Shorter-term Treasury yields climbed on Tuesday, while a part of the yield curve saw its deepest inversion in more than four decades, after remarks from Federal Reserve Chair Jerome Powell indicated the US central bank could become more aggressive in its rate hike path.

Powell told the Senate Banking Committee the Fed will likely need to raise interest rates more than expected in light of recent strong data and that it is prepared to move in larger steps if the “totality” of incoming information suggests tougher measures are needed to control inflation.

“At the margin it is hawkish, especially the part where they might increase the pace of hikes,” said Jeffrey Hibbeler, senior portfolio manager for fixed income at Exencial Wealth Advisors in Charlotte, North Carolina.

“Once they downshifted to 25 (basis points), it seemed to me it would take some pretty big changes in the data to shift back up to 50, probably be easier to just prolong 25 basis point hikes, allow the lags of monetary policy to continue and see if policy starts to work the way they want it to. To me, that was the biggest surprise of it,” Hibbeler added.

While shorter-dated yields rose, with the rate on the two-year note closing at a new high since mid-2007 at 5.015%, the reverse was true of longer-dated Treasuries, and the yield on 10-year Treasury notes was down 1.5 basis points at 3.968%.

That led to a closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes inverting to a negative 105.3 basis points, its deepest since August 1981, according to Refinitiv data. Such an inversion is seen as a reliable recession indicator.

The yield on the 30-year Treasury bond was down 3.7 basis points at 3.875%.

An auction of USD 40 billion in three-year notes was seen as solid, according to market participants, with demand for the debt at 2.73 times the notes on sale.

More supply will come to the market this week when Treasury auctions USD 32 billion in 10-year notes on Wednesday and USD 18 billion in 30-year bonds on Thursday.

Yields have steadily climbed in recent weeks after the January jobs report and other economic data pointed to a labor market that remains tight, which increased expectations the Fed will have to maintain its path of rate hikes as inflation remains stubbornly high.

The February jobs report due on Friday is expected to show nonfarm payrolls increased by 203,000, according to economists polled by Reuters, after the much stronger-than-expected 517,000 jobs reported in January.

Fed funds futures were now pricing in more than a 60% chance for a 50 basis-point hike at the central bank’s March 22 policy announcement.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.617%, after closing at 2.764% on Monday.

The 10-year TIPS breakeven rate was last at 2.388%, indicating the market sees inflation averaging 2.4% a year for the next decade.

(Reporting by Chuck Mikolajczak in New York. Additional reporting by Sinéad Carew and Alden Bentley in New York. Editing by Will Dunham and Matthew Lewis)