Market Insider

Thursday is round two in Yellen versus the bond market

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Yellen said nothing: Pro
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Bond market is the bear market: Economist
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What did Yellen say?

Fed Chair Janet Yellen returns to Capitol Hill for a second day of testimony Thursday, and the bond market is likely to once more fight her every word.

As Yellen testified before the House Financial Services Committee on Wednesday, Treasury yields fell. The spread between 10-year and two-year yields moved to the flattest it's been since December 2007 — at 99.40 basis points. The market has been moving in this direction, and it continued to do so as some in the bond market were disappointed that Yellen did not say more about slowing rate hikes or even reversing them.

"I think she did a really good job of explaining the Fed's position, and I think it was somewhat calming from a market standpoint. But it didn't live up to some unrealistic expectations basically because she said we're heading toward rate normalization. Financial instability could slow the process but that's the track we're on," said Ward McCarthy, chief financial economist at Jefferies.

"She did not suggest the liftoff rate hike was responsible for this volatility and it's not. She did not suggest the Fed would backtrack in normalization or using the balance sheet. There were people who thought she was going to say we're the balance sheet of last resort for the universe. ... A lot of people's expectations were based on their positions and that's not the way the Fed operates — or she operates."