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Bond Report: Long-end Treasury yields post biggest one-week gain since June after Fed’s Powell comes out in support of a 2021 taper

Ten- and 30-year yields for U.S. government debt yields slipped Friday after Federal Reserve Chairman Jerome Powell supported a 2021 start to tapering the central bank’s of bond purchases but was vague about timing, though yields posted their biggest one-week gain since June.

Meanwhile, bond investors looked past the U.S. PCE inflation rate, which hit a 30-year high in July as companies confronted major shortages in the wake of the pandemic. Powell said several factors indicate an elevated inflation rate remains temporary.

What yields are doing

The 10-year Treasury note
TMUBMUSD10Y,
1.307%

yields around 1.311%, versus 1.342% on Thursday at 3 p.m. Eastern Time. It rose 5.2 basis points this week, the largest-one week gain since June 25, based on 3 p.m. levels, according to Dow Jones Market Data.

The 30-year Treasury bond rate
TMUBMUSD30Y,
1.907%

was at 1.917%, compared with 1.940% a day ago. It climbed 4.4 basis points for the week, which was also the biggest one-week gain since June 25.

The 2-year Treasury note
TMUBMUSD10Y,
1.307%

was yielding 0.215%, versus 0.237% on Thursday. It was down by almost one basis point on the week.

What’s driving the market?

The Fed’s top two policy makers — Powell and Fed Vice Chairman Richard Clarida — both gave their support Friday in favor of a 2021 start to the tapering process.

In his closely watched Jackson Hole speech, Powell was careful not to discuss the timeframe for a formal taper announcement and reinforced the distinction between tapering and liftoff, or the first interest rate hike. He also emphasized that elevated inflation should be temporary. Taken together, his remarks were interpreted by investors as dovish, meaning a preference for keeping monetary policy easy for as long as possible.

Meanwhile, Clarida told CNBC that he expects the trend of “robust” job gains seen this summer to continue, and “if that happens I would also support commencing reduction in the pace of our purchases later this year.”

But a lack of specificity around the timing of a tapering announcement left investors open to the possibility that such an announcement may not come at the Fed’s September policy meeting.

Read: August jobs report emerges as key test for whether U.S. bond yields will remain lower-for-longer

The remarks by Clarida capped a day of Fed appearances on CNBC, where at least two other officials — Philadelphia Fed President Patrick Harker and Cleveland Fed President Loretta Mester — joined the chorus of voices in favor of tapering soon.

Minutes of the Fed’s July 27-28 meeting showed that most of the 19 top Fed officials said that they thought it would be appropriate to start reducing monthly asset purchases this year. The Fed next meets Sept. 21-22.

U.S. government bond yields have been steadily drifting higher in recent weeks, as investors faced the prospect of an eventual end of an accommodative stance by the Fed.

U.S. data released on Friday showed that the PCE inflation rate hit a 30-year high in July, as the U.S. confronted major shortages. The so-called PCE price index climbed 0.4% in July, government figures show. It was the fifth big increase in a row. Meanwhile, the rate of inflation in the 12 months ended in July edged up to 4.2% from 4%, biggest increase since the first Gulf War in 1991.

Consumer spending also slowed last month — rising by a modest 0.3% that matched the estimate of economists polled by The Wall Street Journal. Americans spent money at a slower pace as delta nipped at the economy, but households are still flush with savings. And personal income jumped 1.1% in July, more than the 0.3% rise that was expected.

U.S. consumer sentiment remained at pandemic lows though in late August on fears about the spreading delta variant of coronavirus, according to a University of Michigan index.

What analysts are saying

Powell “successfully threaded the needle in communicating that tapering will likely begin this year, while reinforcing the notion that tapering does not mean tightening,” said Cliff Hodge, chief investment officer for Cornerstone Wealth. “We believe that barring further setbacks from the Delta variant, that September will likely produce a blowout jobs number and set the table for the official tapering announcement at the September FOMC meeting.”

Powell did “well” in navigating the topics of the economy, the recent uptick in inflation, and the path forward, said Makena Capital Management CIO Larry Kochard. “This is a continuation of the Powell-led-policies, which is a positive for investors.  The biggest risk that could roil this status quo, is the decision to reappoint Powell this winter.  Although he will likely be reappointed, a new Fed Chair would be a negative market event.”

“The exact timing and speed of the taper will be flushed out in the coming meetings and will likely have some dependency on the labor market data in the next couple of months,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “Ultimately, the Fed is attempting to ween the economy off the unprecedented amounts of monetary stimulus without upsetting markets and the over-transparent process is their attempt to do so.”

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