Treasury yields turned higher Wednesday after the Federal Reserve indicated that it could start raising interest rates in March, the first increase in three years.
The yield on the benchmark 10-year Treasury note jumped 8 basis points to 1.86%. The yield on the 30-year Treasury bond was up 5 basis points at 2.18%. Yields move inversely to prices and 1 basis point is equal to 0.01%.
Yields popped to their highs of the session when at a press conference following the decision, Chair Powell emphasized that the central bank was committed to stable prices and that there was “quite a bit of room” to raise rates before harming the labor market.
In its post-meeting statement, the Fed said a quarter-percentage point increase to its benchmark short-term borrowing rate is likely coming soon. It did not provide a specific time for when the increase will come, though indications are that it could happen as soon as the March meeting.
Powell said that there’s a risk that inflation will not decline back toward its pre-pandemic levels any time soon, and that the rise in prices could accelerate.
“Inflation risks are still to the upside in the views of most FOMC participants, and certainly in my view as well,” Powell said. “There’s a risk that the high inflation we are seeing will be prolonged. There’s a risk that it will move even higher.”
Treasury yields have jumped sharply to start the year in anticipation of tighter monetary policy from the Fed. The benchmark rate has risen a substantial amount from 1.51% at the end of 2021.
In addition, the Federal Open Market Committee noted the central bank’s monthly bond-buying will proceed at just $30 billion in February, indicating that program could end in March as well at the same time that rates increase.
The Fed however did indicate in a separate statement that it would begin shrinking its balance sheet after hiking rates, a further tightening action that many traders may have hoped the central bank would have held off doing right away.
“Clarity on the timing and extent of rate hikes, as well as the degree of balance sheet reduction, should help calm markets,” said John Lynch, CIO at Comerica Wealth Management. “We believe left unto normal market forces, the U.S. Treasury yield curve will gradually steepen given global cyclical recovery and less severe pricing pressures.”
— CNBC’s Patti Domm contributed to this market report.