Treasuries Hit Fresh 2021 Highs

US treasury yields are ending the week just off the new yearly highs printed yesterday following a further spike higher in response to comments from Fed chairman Powell who was speaking as part of a conference with the Wall Street Journal. Just a fortnight after his testimony at the Senate Banking Committee caused so much volatility traders were once again paying close attention to his outlook and once again saw big moves in response.

Equities Fall As Powell Acknowledges Inflation Risks

Stock markets slipped as Powell seemed to acknowledge the upside risks from inflation more this time. Powell told the conference: “We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects. could create some upward pressure on prices.” Yields on both the 10-year note and 30-year note spiked higher in response to Powell’s comments.

Effects Likely To Be Transitory

However, the Fed chairman was keen to once again point out that any spike in inflation is likely to be transitory and will look higher simply because of “base effects” and in comparison with the depressed levels seen last year during the height of the pandemic. Powell went on to reiterate that the Fed will be focusing on getting the economy back to full employment, along with inflation sustainably above 2%, before considering raising rates.

No Word On Tapering

However, while Powell reaffirmed the bank’s commitment to keeping rates low, there was no mention of how asset purchases will be handled. The central bank currently purchases $120 billion worth of treasuries and MBS each month. Towards the end of last year we started to hear some Fed officials discussing the possibility of tapering and that is certainly one avenue which the market seems to feel the bank is likely to head down at some point this year.

Concerns Over Inflation Risks

Despite the Fed’s adamance that any inflationary rise this year will be transitory and not require any monetary tightening, there has been concern expressed that the Fed’s commitment to keeping rates low could fuel runaway inflation, as was seen in the 1960s and 1970s. However, the Fed chairman said the bank was “very mindful” of this type of situation recurring again saying: “I think it’s a constructive thing for people to point out potential risks. I always want to hear that.” However, he went on to say “But I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%.”

Technical Views

US10Y

The rally in the 10Y has seen price breaking out to fresh 2021 highs this week with price currently hovering around the 1.55 level. While the 1.422 level holds as support, the near term bias is geared towards further upside with the 1.683 level the next big target for bulls. To the downside, any dip below the 1.422 level will turn focus to support at the 1.282 level next.

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