Treasury yields rise after Fed’s Powell reiterates more 2023 rate hikes are likely

What’s happening

• The yield on the 2-year Treasury note
  TMUBMUSD02Y,
  4.738%
  was 4.726%, up from 4.695% on Tuesday.

• The 10-year Treasury yield
  TMUBMUSD10Y,
  3.775%
  rose to 3.763% from 3.726% Tuesday afternoon.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  3.856%
  advanced to 3.848% from 3.815% on Tuesday.

What’s driving markets

In testimony delivered to the House Financial Service Committee on Wednesday, Powell told Congress that, with U.S. inflation well above target, more interest rates are likely this year. However, he was vague about the timing.

”Nearly all FOMC [Federal Open Market Committee] participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” he said during the first of two days in his semi-annual congressional testimony.

During the question-and-answer session, Powell said the Fed’s decision to skip a rate hike in June while projecting more hikes to come was “consistent,” given the likely need to raise rates “at a more moderate pace” than before. He also said policy makers remain “very focused” on getting inflation back to a 2% target.

Last Wednesday, Fed officials held the benchmark interest-rate target steady at between 5% and 5.25%, and indicated two more hikes are appropriate this year. Fed funds futures traders are now pricing in a slightly greater chance of a another quarter-of-a-percentage-point rate hike in September, November or December — after factoring in a similar-size move in July, according to the CME FedWatch Tool.

Read: ‘Confused’ markets get another chance to hear Fed’s Powell ‘flesh things out’ on 2023 rate path

Elsewhere, hotter-than-expected consumer prices in the U.K. is raising the prospect of a bigger-than-expected interest rate hike of 50 basis points. The yield on the 10-year gilt
TMBMKGB-10Y,
4.402%
rose 8.79 basis points to 4.424%.

What strategists are saying

“The Fed is content to champion the no cuts narrative as the primary messaging,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.

“Keeping July and September as live meetings is an effective way of distracting investors from their prior preoccupation with pricing in rate cuts by year end,” they said in a note. “It’s been a successful communication strategy thus far and we’d be surprised if Powell felt compelled to revisit it at this stage.”