Bond Report: Treasury yields see sharpest one-day rise in nearly 2 weeks as Biden picks Powell for second Fed term, named Brainard No. 2

The rise in yields came as stocks rallied on the White House’s announcement that President Joe Biden would nominate Federal Reserve Chairman Jerome Powell to a second four-year term. Some market participants also attributed the rise in yields to comments made by the Fed’s No. 2 official on Friday.

What are yields doing?

• The 10-year Treasury note TMUBMUSD10Y, 1.629% yields 1.625%, up 9 basis points from 1.535% on Friday at 3 p.m. Eastern Time.
• The 2-year Treasury note TMUBMUSD02Y, 0.594% was yielding 0.580% from 0.503% at the end of last week, up 7.7 basis points and hitting the highest level since March 5, 2020.
• The 30-year Treasury bond yield TMUBMUSD30Y, 1.964% was at 1.978%, climbing 7.2 basis points, compared with 1.906% on Friday afternoon.
• All three of the Treasury debt yields registered the largest one-day gain since Nov. 10.

What’s driving the market?

Yields for government debt rose Monday as investors continued to process higher inflation and higher rates in the COVID-19 recovery. Meanwhile, the White House announced that Biden has nominated Powell to another four-year term, and has decided to nominate Fed Gov. Lael Brainard to serve as the central bank’s vice chairwoman.

Biden’s nomination of Powell now heads to the Senate, where its banking committee will vet the nominee before taking it to a vote. To be confirmed, Powell needs to be approved through a simple majority vote in the Senate.

Investors cheered Biden’s decision, with stocks opening higher in reaction. All three major indexes — the Dow industrials DJIA, +0.05%, S&P 500 SPX, -0.32% and Nasdaq Composite indexes COMP, -1.26% — headed higher Monday morning after the announcement, before ending the session mostly lower. Treasury yields also climbed across the board.

The pick of Powell was widely anticipated, but may have cemented the view that federal funds rates, which stand at a range between 0% and 0.25%, will eventually be pushed higher, with the U.S. swaps market now pricing in a full 25 basis point rate increased in June and a second increase in November of 2022. 

On Friday afternoon, Federal Reserve Vice Chairman Richard Clarida, speaking at a virtual event, said that it may well be appropriate to discuss accelerating the Fed’s tapering of asset purchases when policy makers convene their final meeting of 2021 next month.

“The rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022,” Clarida said.

In Europe, yields for government debt rose, despite concerns about the spread of COVID-19 in parts of the region, including Austria, which entered its fourth lockdown, and Germany. Germany’s benchmark 10-year bond TMBMKDE-10Y, -0.299%, known as the bund, was yielding negative 0.314%, compared with negative 0.339% on Friday.

In U.S. economics news, the Chicago Fed National Activity Index rose to 0.76, up from minus 0.18 in September. October’s national activity was expected to rise to 0.90.

The report from the Federal Reserve Bank of Chicago is composed of 85 economic indicators drawn from four broad categories of data, including production and income; employment, unemployment and hours; personal consumption and housing; and sales, orders and inventories. A positive reading corresponds to growth above historical trend and a negative one signals below-trend expansion.

Separately, existing home sales increased 0.8% between September and October, hitting a seasonally-adjusted, annual rate of 6.34 million. Economists had expected a 6.2 million annual rate.

On the supply front, an auction of $58 billion in 2-year notes saw what traders described as a weak auction, followed by a sale of $59 billion in 5-year Treasurys TMUBMUSD05Y, 1.323% which also was described as lackluster on Monday afternoon. The weak auctions contributed to selling in bonds, at least one strategist said on Monday.

Auctions can reflect and even influence trading in the wider array of Treasurys, helping to drive yields.

What analysts are saying

• “The market is somewhat relieved that it is Powell,” said Tom Graff, head of fixed income for Brown Advisory in Baltimore. “Powell is much more of a known quantity and that’s why you are seeing a little bit more of a selloff in bonds, particularly in the front end, and a relief rally in stocks. Clearly, the market prefers that continuity.”
• “The inflation risk for 2022 is that with the lid off goods prices and a strong profit year in 2021, the nation is set for broad wage gains in the coming year — gains to date that have gone where workers are in short supply,” wrote Steven Blitz, chief U.S. economist at TS Lombard, in a Monday note. “The only way for the Fed to counter this inflation, without damaging the recovery and, more importantly, the equity market, is to ramp up the dollar. Rhetoric about raising the funds rate, supported by accelerating the taper, accomplishes this goal.”
• “This set of events, combined with uninspired takedowns of the 2- and 5-year auctions has contributed to a notably negative tone in Treasuries to start the holiday shortened week,” wrote Ian Lyngen and Ben Jeffery strategists at BMO Capital Markets in a Monday note, referring to the auctions and the Fed announcement.