The 10-year U.S. Treasury yield jumped above 1.7% on Thursday despite reassurance from the Federal Reserve that it had no plans to hike interest rates anytime soon, nor taper its bond-buying program.
The yield on the benchmark 10-year Treasury note was up 9 basis points to 1.745% by 8:30 a.m. ET. The yield on the 30-year Treasury bond climbed 5 basis points to 2.503%. Yields move inversely to prices. (1 basis point equals 0.01%.)
The 10-year broke above 1.4% earlier in the session, marking its highest level since Jan. 24, 2020, when it topped out at 1.762%. This is also the first time the 30-year has traded above 2.5% since August 2019.
After the Fed’s two-day policy meeting concluded Wednesday, the central bank said it sees stronger economic growth than previously estimated, forecasting gross domestic product to rise to 6.5% in 2021. This is up from the 4.2% GDP increase forecast in December.
The Fed also expects core inflation to hit 2.2% this year, but has a long-run expectation of it sticking around 2%. The central bank also indicated that it didn’t plan to hike interest rates through 2023 and that it would continue its program of buying at least $120 billion of bonds a month.
These projections reinforced the idea that the Fed is willing to let the economy run hot for a period of time to allow the U.S. to recover from the Covid pandemic. Bond investors fear this means the central bank will let inflation increase more than normal, eroding the value in bonds.
Fed Chair Jerome Powell reiterated that the central bank wants to see inflation consistently above its 2% target, and material improvement in the U.S. labor market, before considering changes to rates or its monthly bond purchases.
Quilter Investors portfolio manager Hinesh Patel said Wednesday following the Fed’s policy decision, that “while no response right now is arguably the only move on offer, whatever Powell does at this juncture, the Fed are taking bond markets to the danger zone.”
“If they don’t do anything the bond market will continue pushing yields higher looking for the Fed to increase or adjust bond-buying while if he does act now then he will be accused of overstimulating and running too hot,” Patel said.
However, Willem Sels, chief investment officer for private banking and wealth management at HSBC, said the Fed’s message of a gradual normalization of policy meant this was a “very different situation than 2013, where bond tapering caught the market by surprise, leading the real yield to spike quickly and significantly, and causing equities, gold and risk assets to sell off.”
There has been some concerns that the recent rise in bond yields and inflation expectations could mean a repeat of the 2013 “taper tantrum.” This was when Treasury yields spiked suddenly because of market panic after the Fed said it planned to start tapering its quantitative easing program.
Initial jobless claims for the prior week came in a worse-than-expected 770,000, but the Philly Fed’s manufacturing outlook survey was better than expected.
Auctions are due to be held Thursday for $40 billion of four-week bills, $40 billion of eight-week bills and $13 billion of 9-year 10-month Treasury Inflation-Protected Securities.
— CNBC’s Thomas Franck contributed to this report.