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Bond Report: 10- and 30-year Treasury yields advance to 3-year highs as investors assess Fed’s balance-sheet strategy

Treasury yields turned mixed on Thursday, a day after minutes of the Federal Reserve’s March meeting outlined plans to begin scaling back the central bank’s nearly $9 trillion balance sheet.

Long-end yields advanced while their shorter-dated counterparts fell — steepening the spread between 2- and 10-year yields to as much as 18 basis points.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.650%

rose to 2.649%, compared with 2.606% at 3 p.m. Eastern on Wednesday. Wednesday’s level was its highest since March 19, 2019, according to Dow Jones Market Data.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.461%

was 2.453% versus 2.5% Wednesday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.674%

stood at 2.699%, compared with late Wednesday’s level of 2.631%, its highest since July 16, 2019.

What’s driving the market?

Long-dated yields continued to climb Thursday morning after minutes of the Federal Reserve’s March meeting provided investors with an outline of the central bank’s plans for shrinking its nearly $9 trillion balance sheet.

The summary showed that Fed officials want to reduce the balance sheet by $95 billion a month after a three-month phase-in. The process could potentially begin in May, but policy makers have yet to make a final decision, the minutes said.

They also showed some support for half-point rate hikes at upcoming meetings if inflation remains high or gets even worse. Sales of its mortgage-backed securities holdings also remained on the table, the minutes showed.

Read: The Fed’s plan to rapidly slash its balance sheet is out. Here’s what happens to money in the system.

Data released on Thursday showed that initial jobless claims matched a 54-year low of 166,000 for the week that ended April 2 — the second lowest reading in history— during a period of remarkably strong hiring and the lowest layoffs on record.

St. Louis Fed President James Bullard, who has been in the vanguard of Fed officials pushing for a more aggressive policy response, dismissed talk of recession on Thursday, saying that the U.S. expansion “is not ‘old’ and can continue for a long time.”

Chicago Fed President Charles Evans and Atlanta Fed President Raphael Bostic were scheduled to speak in the afternoon. February consumer credit figures were set for release at 3 p.m. Eastern.

What are analysts saying?

“The Fed’s hasty normalization plans have a feeling of ‘behind the curve’ around them,” wrote analysts at KBC Bank, in Brussels. “Only one month ago, the Fed was still buying bonds on a net basis. In the previous [quantitative-tightening]-cycle, it took them one year to hit the maximum speed of $50bn/month.”

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