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

Long-dated U.S. bond yields had their biggest one-day declines in a month on Thursday and slipped from the highest levels since June, as traders eyed Federal Reserve policy chatter from the Jackson Hole central bankers’ symposium.

What’s happening
  • The yield on the 2-year Treasury

    declined 1.2 basis points to 3.372% from 3.384% on Wednesday afternoon.

  • The yield on the 10-year Treasury

    retreated 8.2 basis points to 3.023% from 3.105% on Wednesday. That’s the largest one-day decline since July 22, based on 3 p.m. levels, according to Dow Jones Market Data.

  • The yield on the 30-year Treasury

    fell 8.6 basis points to 3.234% from 3.320% on Wednesday. That’s the largest one-day decline since July 21.

The 10-year to 2-year spread narrowed to minus 36 basis points after St. Louis Fed President James Bullard made the case for front-loading rate hikes this year, and said financial markets are 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.”

However, St. Louis Fed President James Bullard again made the case for “front-loading” rate hikes this year in a CNBC interview.

The Federal Reserve should continue to raise its benchmark policy interest rates swiftly and bring the benchmark rate to a range of 3.75%-4% by year-end, St. Louis Fed President James Bullard said Thursday. “We’ve got inflation right now. We’ve got a strong labor market right now. It seems like a good time to get to the right neighborhood for the funds rate,” Bullard said.

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 between 3% and 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 notes produced the second-lowest dealer takedown on record, according to Jefferies economists.

What analysts are saying

“The macro backdrop for Powell’s Jackson Hole speech is far more favorable than might have been feared a month or two back. The Fed is faced with a surprisingly robust labor market, evidence of a peaking in inflation, and financial conditions that have taken Fed tightening on the chin,” said Deutsche Bank’s Alan Ruskin.

“The S&P above 4000 has likely fully priced a yield curve mix of a 3.5%+ fed funds and a 3%+ 10y yield,” Ruskin said. “It is likely that over time the Fed will have to go beyond what is priced, on the assumption that the inflation impact of supply side improvements will need to be supplemented by greater demand restraint for the Fed to come close to reaching its inflation target on a desired timetable.”

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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