Powell to Testify Today

Fed chairman Jerome Powell will be in the spotlight when he testifies before the Senate Banking Committee later today. The Fed chair kicks off two days of testimonies amidst a backdrop of soaring US treasury yields and rising inflation expectations. Powell is due to take part in the Fed’s semi-annual monetary policy report and while over recent months the focus has been on whether the Fed will look to ease again to help buffer the economy as the pandemic progresses, the focus seems to have shifted now with traders now looking to see how the Fed will address the ongoing surge in yields.

Treasury Yields Soaring

The yield on the 10-year note has now risen by 0.90% since the summer 2020 lows and has recently broken above the 1.33 level resistance. The increase has now taken yields on the benchmark note back up to pre-pandemic levels following an almost 0.50% rally this year so far. Looking further out on the curve, yields on the 30-year note have also ballooned since the summer, moving up from the 1.20 August 2020 lows to current highs around 2.20. Again, yields on the 30-year note are now back up at pre-pandemic levels.

Will Fed be Forced To Act?

With treasury yields soaring and bond prices sinking, traders are now starting to question whether the Fed is going to have to abandon its ultra-loose monetary policy ahead of schedule. So far, the Fed has said that rates will not be hiked until at least March 2023. Additionally, it has said that asset purchases will remain in place throughout this horizon also. However, if yields continue to rise at this pace, the Fed might be forced to act sooner than it would like.

Overheating Risks

In a bid to downplay these concerns, the Fed has recently reaffirmed its commitment to keeping easing in place. Additionally, the Fed has said that it is willing to look through any temporary spike in inflation echoing the change intact seen over recent years where the Fed said that it will no longer target 2% inflation as a hard level. With the Fed to allow inflation to run above target, this affords them some scope in lifting rates. However, the big problem then is the risk of overheating if inflation starts to get away from them and they act too late. With this in mind, Powell’s comments this week will be closely watched and have the potential to cause plenty of market volatility.

Technical Views

US10Y

Following the breakout above the bearish trend line and the 1.00 level, the 10Y has risen above the 1.28 level and is now fast approaching resistance at the 1.42 level. While 1.28 holds as support the bias remains bullish in the near term with a breakout above 1.42 towards 1.50 the next objective for bulls.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.