Yields for benchmark bonds on Monday climb higher on the long-end for the curve, with the long bond notching its sharpest yield climb since March. The moves come as investors continue to position following a Federal Reserve update last week that was interpreted as more inclined to end pandemic-era accommodations sooner than later, even as the central bank views surging pricing pressures as likely to be short-lived.
How Treasurys performed
Fixed-income drivers
Strategists didn't offer an clear reason why yields turned lower and then popped up, but some attribute it to bearish positioning, with investors forced to unwind bets that prices would head lower, pushing yields higher.
Read:Markets are sending 'peculiar' signals as Fed changes tune--here's what they mean
In theory, the Fed's stance that post-COVID inflation pressures should be short-lived and the expectation that the Fed could begin raising rates as early as late 2022 or early 2023, should be nudging yields higher.
But bond yields, which move opposite to prices, have been reluctant to hold higher for an extended period in benchmark 30-year and 10-year Treasurys, which are used to price everything from mortgages to corporate bonds.
On Monday, both St. Louis Fed President James Bullard and Dallas Fed President Rob Kaplan said they expect the pace of inflation next year to remain above the central bank's target.
Last Friday, Bullard, in interview with CNBC, suggested that he would be inclined to see the Fed lift interest rates by late 2022 and said that Fed Chairman Jerome Powell has effectively opened the door to tapering the central bank's monthly purchases of $120 billion in Treasurys and mortgage-backed securities.
The market will hear from Powell again on Tuesday when he testifies before the House select subcommittee on the impact of the coronavirus on the economy.
What strategists said
Inflation-themed "trades such as a bear-steepening of the curve and a weaker dollar depend on the Fed remaining dovish, with the implication that a hawkish Fed would move markets in reverse," wrote Alex Pelle and Steven Ricchiuto, U.S. economists at Mizuho, in an afternoon note.
"Our view is that Powell remains solidly on the dovish end of the FOMC, but he is a Chair trying to manage an increasingly factious committee as incoming inflation data surprises to the upside."
Still, the trajectory of monetary, including any pullback, will hinge on the labor market recovery, the team wrote, adding that with the "realistic unemployment rate closer to 7.9%," realizing the "gargantuan task" of a 4.5% unemployment rate by year-end would be difficult and "require job growth averaging around 900K job additions per month for the next 6 months."
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