Rising bond yields could be tied to recent comments from Federal Reserve officials

Published Tue, Aug 10 20216:02 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Treasury yields, which have been mystifying the market all summer , are now moving higher on what seems to be a clear message from some Federal Reserve officials: They are getting ready to move away from easy policy. Since Fed Vice Chairman Richard Clarida spoke last Wednesday , the yield on the benchmark 10-year Treasury has moved higher by more than 20 basis points, or 0.20%. Bond yields move opposite price. Other central bank officials, including Atlanta Fed President Raphael Bostic , have also recently spoken in favor of tapering the central bank's $120 billion a month bond-buying program. The 10-year Treasury yield was at 1.35% late Tuesday. As of late, the yield had been moving strangely lower on a variety of factors, some technical and some reflecting concerns about Covid and slowing growth. Now the 10-year yield is moving higher in reaction to Fed speakers and better economic data. It's also rising ahead of Wednesday's Treasury auction. Comments that 'turned the market' Clarida is important since he is viewed by the market as a dove at the center of the Fed, and his comments were direct. The vice chairman said he expects the Fed's economic goals could be met by the end of next year, and the central bank could begin raising interest rates in 2023. He also said there are chances for an upside surprise in inflation, and he reportedly said that he could support trimming the Fed's bond purchases later this year if the economy continues to improve as expected. In his comments last week, Clarida gave no timeline on the tapering of the Fed's $120 billion a month bond buying program. "Those comments turned the market," said George Goncalves, head of U.S. macro strategy at MUFG. He said the 10-year yield, which moves opposite price, was just touching its recent low of 1.12% for a second time before Clarida's comments. Two pivotal tests for the 10-year Treasury yield Two important tests for the 10-year on Wednesday. First, the consumer price index will be released at 8:30 a.m. ET, and if it is higher than the half percent increase expected, yields could continue higher. At 1 p.m., there is also a $41 billion 10-year auction, which could also influence the direction of rates depending on demand. But for now, it's the Fed driving the market. Clarida's comments came days after Fed Governor Christopher Waller said he could see the central bank begin tapering its bond purchases as early as October. On Monday, Atlanta Fed President Bostic said he could see a fourth-quarter tapering if the labor market continues to improve. That same day, Richmond Fed President Thomas Barkin said the economy has made "substantial progress" with respect to prices . Finally, Boston Fed President Eric Rosengren told the Associated Press on Monday that the Fed should be paring back bond buying this fall and announce it in September. "It feels like there's a campaign by Fed speakers to stop what was an unending rally toward lower rates," said Goncalves. "You could say Waller started it... Clarida last week really set the tone." Goncalves said the 10-year yield has also broken above its 200-day moving average, around 1.29%, an important technical level to some investors. The 10-year is the most widely watched Treasury yield as its movements impact the stock market, and it is the rate that influences mortgages and other loans. Friday's strong jobs report was further fuel for a rate gain, since the 943,000 payrolls put the Fed closer to its goal of a stronger labor market. Fed Chairman Jerome Powell has said the central bank would like to see a few strong employment reports before it could decide whether to pare back the bond program or not. A key voice missing from the chorus Announcing the tapering is important since it would be a first step toward ending the Fed's $120 billion a month bond purchases. The tapering process is expected to take at least 10 months and would open the door to an interest rate hike by the Fed. "I would definitely comment that the biggest Fed official has not joined the chorus," said Wells Fargo Securities' Michael Schumacher. He said Powell has to throw his support behind winding down the program before the market would expect the Fed would proceed. Central bank officials were expected to discuss the bond program at their symposium in Jackson Hole, Wyo., starting Aug. 26. Schumacher said he does not expect Powell to be on board with tapering by that date. He said it could take several more jobs reports before Powell joins the chorus, and his speech at Jackson Hole could continue to sound noncommittal. "If he says next to nothing, people will be disappointed and he'll sound dovish," said Schumacher. He and others said it was interesting that Clarida, who market pros consider to be close to Powell, would have sounded as hawkish as he did. "It's pretty unusual for there to be disagreement among the governors. I would imagine Powell and Clarida talk regularly," Schumacher said. It feels like there's a campaign by Fed speakers to stop what was an unending rally toward lower rates. You could say Waller started it... Clarida last week really set the tone. head of U.S. macro strategy at MUFG George Goncalves Goncalves said the comments could be a prelude to what the tone will be at Jackson Hole. "If the Fed speakers were just mum between now and Jackson Hole and rates were at the lows, at 1.1%, 1.12%, and then they shock us, we would have a 'taper tantrum' in the last week of August," he said, referring to the negative market reaction when the Fed moved away from easy policy in 2013. "They want to avoid that, and they want to get out ahead." The move in Treasurys comes also as the market is buzzing with talk about whether Powell will remain Fed chairman after February when his term expires. The Wall Street Journal Tuesday reported that the opposition to Powell by progressive Democrats has made it unclear whether he will remain chair. Andy Brenner of National Alliance said he does not think Powell is behind tapering yet. "The Fed is becoming more hawkish. There's no question about it. It's just a question of when Powell gets the message," he said. Brenner said the market trend is now for higher yields. He said the 1.36% level is important and it shows up on charts ahead of two moves higher. He also said the timing of a Fed taper in the fall would make sense since the Treasury is expected to reduce the size of auctions, because of higher tax revenues. "I think at the end of the day, the market's going to take its cues from the Fed, not the data," said Schumacher. He said the Fed has helped send yields higher, and the market's moves are more clear. "It wasn't clear why the yield went down to 1.12%...The rise was a little more clear than the drop," he said. Schumacher said he expects the Fed to announce tapering between October and December of this year. He predicts the Fed would begin to slow its purchases of $80 billion in Treasurys and $40 billion in mortgages starting early in the new year.

Federal Reserve Board building is pictured in Washington, U.S., March 19, 2019.

Leah Millis | Reuters