Investors flock to Treasuries as stock market gives up early gains and Dow industrials tumbles more than 400 points

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U.S. Treasury yields headed lower in the Thursday afternoon session, pausing a recent runup in market-based rates, as stocks sold off and the Dow Jones Industrial Average fell by more than 400 points.

Until now, yields had mostly been on a move higher after the Federal Reserve signaled last week that it could start tapering its monthly purchases of Treasurys and other bonds in November. Worries about too-hot inflation had also helped to drive rates steadily higher.

What yields are doing

  • The 10-year Treasury note was at 1.513%, compared with 1.54% at 3 p.m. Eastern Time on Wednesday.
  • The 2-year Treasury note yields 0.289%, versus 0.297%.
  • The 30-year Treasury, also known as the long bond, yields 2.072%, compared with 2.089% on Wednesday.

What’s driving the market?

In testimony to a U.S. House Committee on Financial Services on Thursday, Federal Reserve Chairman Jerome Powell told lawmakers again that the factors pushing inflation higher could last until next summer.

Powell said that the economy is experiencing “a very unusual event” of supply-side restrictions. “We expect that those will abate, that they’ll lessen, and over time inflation will come back down,” Powell said.

However, “exactly when that will happen is not possible to say,” he said. “But I would say we should be seeing some relief in coming months and over the course of the first half of next year.”

The Fed chairman, appearing alongside Treasury Secretary Janet Yellen, also said the central bank could face difficult decisions next year if inflation stays high, while unemployment is elevated.

Thursday’s comments from Powell followed his appearance on Wednesday at a discussion hosted by the European Central Bank, where he said that inflation may be more persistent than first anticipated. “It’s very difficult to say how big the effects will be in the meantime or how long they last.” However, he still held that they would eventually fade, a common refrain by many members of the Fed.

The parade of Fed speakers appearing on Thursday included Atlanta Fed President Raphael Bostic, who said it’s time to end emergency aid for the recovering U.S. economy.

Until Thursday’s turnabout, yields had been mostly on the rise since last week, with investors positioning for pricing pressures that could last for longer than anticipated and could lead to a more rapid rate of interest-rate increases for the central bank.

Read: Sudden realization that inflation may persist is starting to dawn on many U.S. investors

At the conclusion of the Fed’s two-day policy meeting last week, policy makers penciled in a sooner-than-expected rate increase by the end of 2022, and indicated that a tapering of their bond purchases may soon be warranted. The central bank next meets on Nov. 2-3, when it is expected to formally announce a reduction of its monthly purchases of $120 billion in Treasury and mortgage-backed securities.

Inflation hurts bonds the most of all asset classes because it erodes their fixed value, prompting investors to sell off and yields to rise. Yields and bond prices move in opposite directions.

In data releases on Thursday, U.S. jobless claims jumped to a two-month high amid surge in California. New jobless claims paid traditionally by the states rose by 11,000 to 362,000 in the seven days ended Sept. 25, the government said.

The economy grew at a revised 6.7% annual pace in the second quarter, as the U.S. got a big jolt in the spring from government stimulus payments and coronavirus vaccines allowed businesses to reopen. The government’s third estimate of second-quarter GDP was largely in line with its prior analysis.

A measure of business conditions in the Chicago region slipped in September to its lowest level in seven months. The Chicago Business Barometer, also known as the Chicago PMI, slowed to 64.7 in September from 66.8 in the prior month — moderating from a record high of 75.2 in May.

Meanwhile, the Democratic-run Senate is expected to vote Thursday on legislation that would just avoid a partial government shutdown by keeping the federal government funded into early December.

What analysts say

  • “The debate over inflation has become polarized between those who expect a return to the 1970s and those who believe inflation is still dead,” said Neil Shearing, group chief economist at Capital Economics. “The reality is more nuanced and inflation outcomes are likely to vary between countries.”
  • “We think the Fed and others will deliver less tightening than priced in the coming two years and volatility rather than a straight line higher is likely for rates,” TD Securities strategists Rich Kelly and Jacqui Douglas wrote in a note Thursday.
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