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Bond Report: 2-year Treasury yield climbs on remarks by Fed’s Waller, but still has biggest monthly drop since March 2020

U.S. government bond yields rose steeply Tuesday morning after a three-day holiday weekend, lifted by a hawkish speech from a Federal Reserve official on the need to raise interest rates beyond a neutral setting.

U.S. financial markets were closed Monday because of the Memorial Day holiday.

What Treasury yields are doing

The yield on the 10-year Treasury
TMUBMUSD10Y,
2.856%

advanced to 2.859% from 2.748% late Friday.

The yield on the 2-year Treasury
TMUBMUSD02Y,
2.556%

rose to 2.565% from 2.498% Friday afternoon.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.059%

also rose to 3.076% versus 2.977% on Friday.

What’s driving the market

Tuesday’s rise in U.S. yields came as Federal Reserve Gov. Christopher Waller said in a speech in Frankfurt, Germany, on Monday that he wants to keep lifting interest rates by half percentage point increments until he sees signs that inflation is coming down.

“In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target. And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation,” Waller said.

By contrast, Fed Chair Jerome Powell has said half-point rate hikes are likely at each of the Federal Open Market Committee’s meetings in June and July, but that policy makers are prepared to do either less or more depending on how the economy evolves.

Data released on Tuesday showed that home prices increased more than 20% in 20 cities nationally on a year-over-year basis during March, according to an S&P CoreLogic Case-Shiller index. The Chicago PMI, or Institute for Supply Management’s index of business conditions in the Chicago area, rose to 60.3 in May from 56.4 in the prior month. Meanwhile, a U.S. consumer-confidence reading fell to 106.4 in May from 108.6.

What analysts are saying

Some of the optimism that the Fed may slow its removal of monetary accommodation later this year, after front loading rate hikes in June and July “has faded following hawkish comments from Governor Waller, which has gotten the week started for risk sentiment on a somewhat dour note,” said strategists Daniel Krieter and Daniel Belton at BMO Capital Markets.

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