U.S. government bond yields posted their biggest one-day advance in three months on Wednesday after the Federal Reserve signaled a sooner-than-expected increase in interest rates.
The yield on the 10-year Treasury note, which helps set borrowing costs on everything from mortgages to corporate debt, rose to 1.569%, according to Tradeweb, up from 1.498% at Tuesday’s close. That is the largest single-day jump since March 18.
Yields began climbing after the Fed’s median projection showed officials expect to raise the benchmark rate to 0.6% from the current range near zero by the end of 2023, sooner than anticipated in March. The central bank held interest rates steady Wednesday and reiterated that it expects to maintain its $120-billion-a-month pace of bond purchases until “substantial further progress” has been made in the economic recovery.
Yields continued to rise after Fed Chairman
said at a press conference that recent inflation data have exceeded the Fed’s expectations. He reiterated the central bank’s view that inflation is likely to subside by next year as the supply of goods catches up with consumer demand, but said that officials would respond appropriately if prices rise more persistently.
Powell said officials discussed how and when to start reducing purchases of Treasurys and mortgage-backed securities begun during the Covid-19 pandemic, though he said the economy still has to make significant progress before it reaches the central bank’s goals. Mr. Powell has said the Fed would give markets plenty of advance notice before it begins withdrawing easy-money policies.
“Taken all together, there is a much more hawkish tone than any Fed communication that we’ve seen from the consensus,” in a very long time,” said Thomas Simons, an economist at Jefferies.
Fed officials signaled they now expect their preferred measure of inflation to rise 3.4% in the fourth quarter of 2021 from a year earlier, up from a March forecast of 2.4%. Some investors and economists have expressed concerns about higher-than-expected inflation, which erodes bonds’ fixed yields. One market measure watched by investors, the difference between the 5-year Treasury and Treasury Inflation-Protected Securities rates, has risen above 2.4% in recent months, implying inflation is picking up.
Some investors welcome the central bank’s discussion of tapering asset purchases. There is enough demand for government bonds and mortgage-backed securities for the central bank to step back without punishing investors in the long term, said Rob Daly, director of fixed income at Glenmede Investment Management, which manages $4.5 billion in fixed- income assets.
“While the market may not like a moderately hawkish tone, it is the right thing to do and is still incredibly accommodative,” he said. “Tapering is not raising rates.”
The Fed will be patient with tightening its policies to ensure that it doesn’t overreact and slow the pace of the economic recovery, said Scott Ruesterholz, portfolio manager at Insight Investment, in a note to clients Wednesday.
“It is important to remember that we are debating when the Fed will begin tapering or slowing the pace of its balance sheet growth,” he wrote. “We are still multiple years away from even discussing modest reductions in the size of the Fed’s balance sheet in our view.”
—Sam Goldfarb and Hardika Singh contributed to this article.
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