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Bond Report: 10- and 30-year Treasury yields post sharpest declines in a month ahead of Powell’s Jackson Hole speech


Most U.S. bond yields moved lower on Thursday, with 10- and 30-year rates slipping from the highest levels in two months, as traders eyed Federal Reserve policy chatter from the Jackson Hole central bankers symposium.

What’s happening

The yield on the 2-year Treasury

advanced to 3.384% versus 3.384% on Wednesday afternoon.

The yield on the 10-year Treasury

retreated to 3.031% from 3.105% on Wednesday.

The yield on the 30-year Treasury

fell to 3.232% from 3.320% on Wednesday.

The 10-year to 2-year spread narrowed to minus 34 basis points after St. Louis Fed President James Bullard told CNBC that financial markets may be underestimating the persistency of inflation.

What’s driving markets

Earlier in the day, Kansas City Fed President Esther George told CNBC that it remains unclear if July’s downward surprise in U.S. inflation is the start of a trend.  She also said inflation remains broad-based and there is “more work to be done.”

Her remarks echoed similar remarks made by her colleague, Atlanta Fed President Raphael Bostic, who said the U.S. central bank still has some way to go in lifting interest rates this year. Bostic told The Wall Street Journal in an interview Wednesday that he hadn’t decided whether the Fed should increase interest rates by 50 basis points or 75 basis points at its policy meeting next month, and “at this point, I’d toss a coin between the two.”

Investors will be watching closely for Fed Chairman Jerome Powell’s speech on Friday at the Fed’s Jackson Hole, Wyo., summer symposium, which is being hosted by George’s regional bank. Markets are pricing in a 60.5% probability that the Fed will raise interest rates by another 75 basis points to a range of 3% to 3.25% at its Sept. 20-21 meeting.

In other developments Thursday, U.S. weekly initial jobless claims fell to a one-month low of 243,000, a sign that the labor market remains tight. And the U.S. economy shrank at a revised 0.6% annual pace in the second quarter, or by less than initially estimated.

Treasury’s $37 billion auction of 7-year bonds produced the second-lowest dealer takedown on record, according to economists at Jefferies.

What analysts are saying

“It’s been an eventful 24 hours for markets, with sovereign bonds selling off again as investors keep ratcheting up their expectations for central bank rate hikes over the months ahead,” Deutsche Bank’s Henry Allen, Jim Reid and Tim Wessel said in a note released overnight in the U.S.

“Fed Chair Powell’s speech at Jackson Hole tomorrow could throw some more light on how far they’ll go,” they wrote in a note.

Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.

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