Bonds

Treasury yields rise after Powell's first day of testimony on Capitol Hill

Federal Reserve Board Chairman Jerome Powell speaks during a press conference following the January 28-29 Federal Open Market Committee meeting, in Washington, DC on January 29, 2020.
Mandel Ngan | AFP | Getty Images

U.S. government debt yields rose Tuesday as investors digested the first day of Federal Reserve Chairman Jerome Powell's testimony to lawmakers about the state economic growth and employment in the United States.

The yield on the benchmark 10-year Treasury note was higher at around 1.585%, while the yield on the 30-year Treasury bond was also higher at around 2.05%. Bond yields rise as prices fall.

As part of the Fed chair's semiannual report, Powell told the House Financial Services Committee that the central bank is on track to continue bill purchases and repo operations into the second quarter. The Fed began the unusual purchases last autumn to help calm the short-term plumbing that runs the financial market's operating systems.

"Our expectation is that we will continue our bill purchases at least through—at least into the second quarter and continue repo operations at least through—into April," Powell said Tuesday.

"As the underlying level of reserves rises due to our bill purchases, the need for repo will decline," he added. "And sometime around the middle of the year we'll reach that level of ample reserves."

Markets were little changed earlier in the morning after the Fed released Powell's 61-page semiannual report ahead of Powell's oral testimony, where he discussed the current level of borrowing costs. The Fed attempts to maximize U.S. employment and keep prices stable through its adjustments to interest rates, which have remained near historic lows in recent years.

But Powell cautioned that low interest rates, while a positive for business borrowing, could undermine the central bank's ability to respond to an economic downturn in the future.

"This low interest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn," he said. He is also expected to field questions from the U.S. Senate on Wednesday.

The Fed chair also said in prepared remarks that the central bank is "closely monitoring" the coronavirus, its impact on China and the effect it could take on global growth. Powell added that the disease's ascent comes just as trade uncertainties have abated, though the U.S. economy appears "resilient" to global headwinds.

"As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate," Powell said.

Treasurys

Though most investors Tuesday morning didn't expect to hear Powell divert from the Fed's recent commentary about healthy growth and tame inflation, some wondered whether he would take the opportunity to go into detail on repo operations and the central bank's balance sheet.

"It's still an opportunity for a surprise, and given an expected perma-dovish Fed is one of the two pillars of this rally, we need to watch Powell's comments closely," wrote Tom Essaye, editor of the Sevens Report.

"If we are going to get a surprise from Powell, it's likely to come from one of two areas: The Repo operations and the Wuhan virus situation," he added. "If Powell implies that he thinks the repo operations are inflating equity prices, and as such need to end, the market will take that as a negative."

Investors also continued to monitor coronavirus developments and the potential economic fallout of China's fast-spreading disease. As of Monday night, China's National Health Commission reported that a total of 42,638 cases had been confirmed, with 1,016 deaths.

The World Health Organization (WHO) warned Monday that the spread of the deadly pneumonia-like virus among people who had not been to mainland China could be the "spark that becomes a bigger fire."