(Bloomberg) -- US Treasuries slipped as Federal Reserve Chair Jerome Powell told Washington lawmakers he wants more evidence of cooling inflation to realize the market’s bets on interest-rate cuts this year.
The decline in US government bonds pushed most yields higher as Powell testified for a Senate hearing on Tuesday, with the benchmark 10-year’s up as much as five basis points to 4.327%. Swaps traders held tight to expectations for two rate reductions this year, with just over a 70% probability that the first Fed cut comes in September.
“Powell’s comments are balanced and policy decisions will be made ‘meeting by meeting,’” said Subadra Rajappa, head of US rates strategy at Societe Generale. “The market continues to expect a September rate cut, but it’s not set in stone. A sticky inflation print could easily tilt the probabilities.”
As part of his two day semi-annual presentation on the economy and policy, Powell said the Fed was looking for “more good data” to strengthen its confidence that inflation will return to target. Traders will get more information on inflation later this week, when a reading of the consumer price index for June is released on Thursday.
Powell also said the labor market appeared to be “fully back in balance,” and that policymakers were aware that they face risks tied to both cutting rates too soon or too late.
Most Treasury yields are also higher as dealers assess auctions this week, according to Guy LeBas, chief fixed income strategist for Janney Montgomery Scott. A $58 billion sale of three-year notes on Tuesday was awarded at 4.399% versus the 4.407% when-issued yield at the 1 p.m. New York time bidding deadline. That signaled better-than-expected demand for the notes.
Shorter-term yields, though, had edged slightly lower ahead of the auction, with the two-year note’s now little changed on the day.
Here’s what Bloomberg strategists say...
“Yields backed up slightly this morning after Powell’s balanced remarks, and that proved sufficient to ensure that today’s 3-year auction passed smoothly. The offering stopped at 4.399%, nearly a basis point through the when-issued yield, on demand that was solid without being spectacular.”
— Cameron Crise, strategist. For more markets analysis, go to MLIV.
The government will sell $39 billion of 10-year notes in a reopening on Wednesday and $22 billion of 30-year bonds on Thursday.
Powell’s comments in Washington at the US Senate will be followed on Wednesday by an appearance to a House panel.
--With assistance from Carter Johnson.
(Updates with prices and auction results.)
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