Bond yields fell after Federal Reserve Chairman Jerome Powell’s comments on the economy, signaling readiness to address a downturn amid concerns of slow growth, rising unemployment, and inflation. The Fed’s cautious stance, influenced by global tariffs and recent rate cut forecasts, affected market reactions. The 10-year Treasury yield decreased to 4.237%, while two-year yields dropped to 3.959%. Despite a rise in home sales, unemployment claims ticked up, and demand for inflation-protected securities weakened ahead of upcoming Treasury debt sales.
Yields React to Fed’s Economic Signals
The bond yields experienced a decline earlier in the day following remarks from Federal Reserve Chairman Jerome Powell, who indicated that the central bank is poised to respond to any signs of an economic downturn. However, Fed officials expressed concerns about the economic outlook, anticipating a slowdown in growth, rising unemployment, and increasing inflation. Will Compernolle, a macroeconomic strategist at FHN Financial, commented, “The Fed’s guidance yesterday is shrouded in uncertainty, and bond investors should be cautious, as the Fed’s forecasts are as vague as others in the market.”
Fed’s Policy Adjustments and Market Reactions
Mr. Powell noted that the early policies of the Trump administration, particularly significant import tariffs, have likely nudged the U.S. economy toward slower growth and temporary inflationary pressures. Despite worries about economic growth, the Fed’s apprehensions seemed to overshadow fears of a potential spike in prices. Tom di Galoma, managing director of Mischler Financial Group, highlighted that the recent Fed statements and press conference exuded caution, reflecting concerns over the potential economic impacts of global tariffs.
Additionally, President Donald Trump is slated to introduce reciprocal tariffs on April 2. Fed policymakers still anticipate a 50 basis point rate cut this year, alleviating some concerns about a possible adjustment to a single 25 basis point reduction. While the median interest rate forecast remained stable, more policymakers revised their projections to suggest fewer cuts ahead. The Fed also revealed plans to taper its quantitative easing program, allowing bonds to roll off its balance sheet without replacement, which is expected to bolster the bond market further.
The yield on the benchmark 10-year U.S. Treasury bond decreased by 1.9 basis points to 4.237%, after hitting a low of 4.174%, the lowest since March 11. It has fluctuated within a range of 4.106% to 4.353% since February 25. The yield on the two-year bond, closely aligned with interest rate expectations, fell by 2 basis points to 3.959%, having reached 4.107% on Wednesday prior to the Fed’s statement, marking its highest level since February 27 before dropping sharply. The yield curve between the two-year and ten-year bonds steepened slightly to 27.5 basis points.
Latest data revealed a slight uptick in new unemployment claims in the U.S. last week. Interestingly, existing home sales unexpectedly surged in February, with an increase in supply enticing buyers back to the market. However, demand for an $18 billion sale of 10-year inflation-protected securities dipped on Thursday, with the debt sold at a high yield of 1.935%, close to pre-auction trading levels. Demand was 2.35 times the amount of debt offered. The Treasury also announced plans to sell $183 billion of short- and medium-term debt next week, including $69 billion in two-year notes on Tuesday, $70 billion in five-year notes on Wednesday, and $44 billion in seven-year notes on Thursday.