Bond Report: Treasury yields little changed as investors weigh remarks by Fed officials, await jobs data

What are yields doing?

• The yield on the 10-year Treasury note
  TMUBMUSD10Y,
  1.781%
  was at 1.778% at 3 p.m. Eastern, compared with 1.779% at the same time on Monday. The 10-year rate traded above 1.8% in early action. Yields and debt prices move opposite each other.

• The 2-year Treasury yield
  TMUBMUSD02Y,
  1.180%
  was 1.163%, compared with 1.17% on Friday afternoon.

• The 30-year Treasury bond
  TMUBMUSD30Y,
  2.110%
  was 2.097% versus 2.083% late Friday.

• The 2-year yield rose 43.3 basis points in January for the biggest monthly jump since December 2009, according to Dow Jones Market Data. The 10-year yield jumped 28.4 basis points in January, while the 30-year yield increased by 20.9 basis points — the largest jumps for both maturities since March.

What’s driving the market?

At its first policy meeting of 2022 last week, the Federal Reserve signaled it would be aggressive in raising rates and otherwise pulling back on monetary stimulus as it attempts to rein in persistently high inflation. Investors are prepared for a steady stream of rate increases beginning in March, though some analysts have penciled in as many as seven hikes — one for each remaining policy meeting in 2022.

Analysts said a nuanced discussion of rate moves by Fed officials on Monday helped to temper yields, particularly toward the short end of the curve.

Kansas City Fed President Esther George, a 2022 voting member, said the U.S. central bank should raise interest rates soon and pursue a big reduction in its nearly $9 trillion stockpile of bonds. George had previously said she felt it would be appropriate to reduce the balance sheet earlier than it did in the previous tightening cycle.

On Monday, George also said that sharply reducing the balance sheet could allow the Fed to pursue a less aggressive strategy on short-term interest rates.

Related: As stock market plunges, a star money manager says the Fed is making a mistake by focusing on rates. Here’s what Scott Minerd says it should do instead.

Atlanta Federal Reserve Bank President Raphael Bostic, in an interview with the Financial Times published Saturday, said policy makers could, at some point, boost rates by a half-point rather than the typical quarter-point increment if inflation remains stubborn. Bostic, who isn’t a 2022 voting member of the policy-setting Federal Open Market Committee, maintained his call for three quarter-point rate increases in 2022, but said a more aggressive approach was possible if warranted by economic data.

In a Monday interview with Yahoo Finance, Bostic said a half-point hike “is not my preferred setting of policy action at the next meeting,” reiterating his expectation for three quarter-point rate hikes this year. The discussion about a more aggressive hike was meant to show that he is keeping his options open, he added. “I’m going to let the data and the evidence really guide us,”

San Francisco Fed President Mary Daly, who isn’t a 2022 voter, said the Federal Reserve’s coming rate hikes should be “gradual and not disruptive.” She also sounded skeptical about the prospect of a half-point hike.

See: Here’s where Fed voters stand on raising interest rates and reducing $8.8 trillion asset stockpile

The Treasury Department said Monday it expects to borrow $729 billion in the first quarter, $254 billion more than previously estimated, with an end-of-quarter cash balance of $650 billion. Looking ahead to the second quarter, Treasury said it expects to borrow $66 billion in net marketable debt with a cash balance of $700 billion. Borrowing is less in the April-June quarter because of the mid-April deadline for individual taxpayers to file their tax returns.

Labor data will be in the spotlight this week, with December job openings and leavings data set for release on Tuesday morning, Automatic Data Processing’s take on January private-sector jobs is on Wednesday, weekly jobless-claims data on Thursday, and the official January jobs report on Friday.

What are analysts saying?

“Even George was incrementally less hawkish on rates (not the balance sheet); noting that aggressive balance sheet reduction could allow for a shallower hiking path,” wrote strategists Ian Lyngen and Ben Jeffery at BMO Capital Markets.

“Given the uniform nature of the Fed messaging on the heels of Powell’s press conference in which he left the door open for a 50 bp (basis point) hike, our read is that the Committee doesn’t want the market to get too far ahead of what monetary policy makers are prepared to deliver — i.e. 25 bp in March and a balance sheet runoff announcement this summer,” they wrote.