Treasury yields end at lowest levels in at least a week after Fed's Powell sees unlikely chance of a rate hike

By Vivien Lou Chen

Yields on U.S. government debt finished at their lowest levels in a week or more on Wednesday, after Federal Reserve Chair Jerome Powell delivered comments seen as more dovish comments than what was implied by the central bank's own policy statement.

What happened

The yield on the 2-year Treasury BX:TMUBMUSD02Y fell 10.4 basis points to 4.939%, from 5.043% on Tuesday. Wednesday's yield was the lowest since April 24, based on 3 p.m. Eastern time levels. The yield on the 10-year Treasury BX:TMUBMUSD10Y slipped 9.2 basis points to 4.591%, from 4.683% on Tuesday. Wednesday's level was the lowest since April 17.The yield on the 30-year Treasury BX:TMUBMUSD30Y dropped 7.8 basis points to 4.711%, from 4.789% on Tuesday. Wednesday's level was the lowest since April 19.

What drove markets

During his post-meeting press conference, Fed Chair Jerome Powell told reporters that it's unlikely the central bank's next move will be a rate hike and that policy makers' discussions were centered on the notion of holding interest rates at current levels.

As expected, the Fed left interest rates unchanged in the range of 5.25% to 5.50%. In addition, it cited a lack of progress in getting inflation back to its 2% target and said it remains highly attentive to the risks posed by price gains.

Officials said they do not expect to cut interest rates until they have greater confidence that inflation can sustainably move back to 2%. Meanwhile, policy makers also said that, beginning in June, they will slow the pace of declines on the Fed's balance sheet by reducing the monthly redemption cap on Treasury securities to $25 billion from $60 billion.

According to Mohamed A. El-Erian, the former CEO of bond giant Pimco, Powell's remarks fueled "significant" market moves such as Wednesday's decline in the 2-year yield, while the content and tone of his remarks were "notably more dovish than how the markets had interpreted the statement itself."

Earlier on Wednesday, U.S. economic data showed businesses created a stronger-than-expected 192,000 new jobs in April, according to paycheck company ADP - another sign of continued labor-market strength. The number of job openings fell to 8.5 million in March, touching the lowest level in more than three years. Additionally, a closely watched index of U.S. manufacturing activity fell sharply last month, to 49.2%, according to the Institute for Supply Management - a level which reflects a shrinking economy.

Separately, the U.S. Treasury Department announced that it will sell $125 billion of 3-year notes, 10-year notes and 30-year bonds next week. The Treasury also launched its first buyback program in more than 20 years, with a tentative schedule of operations set for May through July on nominal-coupon securities and Treasury inflation-protected securities.

The market's reaction to the refunding announcement was relatively muted, according to TD Securities strategists Gennadiy Goldberg and Molly McGown.

What investors are saying

"Powell's decision to pivot in November was an error of snatching defeat from the jaws of victory," said Brad Conger, chief investment officer at Hirtle Callaghan & Co., which manages $18.5 billion in assets from West Conshohocken, Pa.

"Six months on now, inflation is further away from target," Conger wrote in an email. "Powell effectively missed the exit. We're on an unnecessary detour and the passengers are irritable. No more so, perhaps, than one Joe Biden."

-Vivien Lou Chen

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05-01-24 1548ET

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