Ten-year yields slightly higher after Fed’s Powell speaks

Feb 7 (Reuters) – Benchmark 10-year US Treasury yields were slightly higher on Wednesday after Federal Reserve Chair Jerome Powell said interest rates may need to move higher than expected if strong economic data threatens progress in lowering inflation.

Speaking before the Economic Club of Washington, Powell declined several times to say explicitly that last week’s surprisingly strong employment report would necessarily force the US central bank’s benchmark interest rate higher than the 5.00%-5.25% range currently anticipated.

There is a “significant road ahead” before the Fed could begin rate cuts, he added.

US employers added 517,000 jobs in January, the Labor Department reported on Friday. Meanwhile, the unemployment rate edged down to a 53-year-low of 3.4%.

However, Powell’s comments were less hawkish than market participants expected, confirming the view of many that the Fed was unlikely to hike rates beyond the 5.00%-5.25% band.

“He expects they’re not going to be cutting rates anytime soon, but that there is a good path, that they’re accomplishing what they need to accomplish,” said Shawn Cruz, head trading strategist at TD Ameritrade.

“That feeling that they would go even higher than some expected is going away, so it’s going to help markets,” he said.

Benchmark 10-year yields fell to a session low of 3.597% after Powell’s comments before rising as high as 3.681%, the highest level since Jan. 6. Two-year yields were last at 4.426%, after reaching 4.493% on Monday, also the highest since Jan. 6.

Economists at Morgan Stanley updated their rate-hike expectations for May’s Fed meeting by an additional 25 basis points and continue to expect the first rate cut in December.

The Treasury Department sold USD 40 billion in three-year notes to weak demand on Tuesday, the first sale of USD 96 billion in coupon-bearing supply this week.

Interest in the notes was likely negatively impacted by the sale occurring at the same time as Powell’s comments.

The notes sold at a high yield of 4.073%, more than 3 basis points above where they had traded before the auction, and the bid-to-cover ratio was below average at 2.33 times.

The Treasury will also sell USD 35 billion in 10-year notes on Wednesday and USD 21 billion in 30-year bonds on Thursday.

(Reporting by Matt Tracy in Washington; Additional reporting by Karen Brettell and Carolina Mandl in New York; Editing by Paul Simao)