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Bond Report: 30-year Treasury yield has biggest drop in a month as U.S. stocks finish sharply lower

Treasury yields turned lower on Wednesday as the Dow Jones Industrial Average fell by more than 700 points as disappointing quarterly results from retailers suggested inflation was taking a toll on the economy and as investors reassessed Federal Reserve Chairman Jerome Powell’s hawkish remarks from late Tuesday.

What Treasury yields are doing

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.886%

fell to 2.92%, up from 2.969% at 3 p.m. Eastern on Tuesday.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.673%

was at 2.678% versus 2.696% on Tuesday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.067%

was at 3.101% versus 3.161% late Tuesday.

What’s driving the market

Treasury yields fell on Wednesday amid a sharp drop in all three major U.S. stock indexes, with investor sentiment turning increasingly negative.

On Tuesday, speaking at a Wall Street Journal event on Tuesday, Powell said that the Fed would keep raising interest rates until there was “clear and convincing evidence” that inflation was coming down. He said that, if necessary, the Fed wouldn’t hesitate to push rates past “broadly understood levels of neutral” to bring down inflation. The neutral rate is the level at which policy neither boosts nor slows economic growth.

Powell reiterated that half a percentage point interest rate hike at both the June and July meeting remained the baseline case. The Fed chief said there may be some “pain” ahead in terms of slower growth or higher unemployment but that there remained “plausible paths” to a “softish” landing for the economy.

Data released on Wednesday showed U.S. housing starts dipped 0.2% to an annual pace of 1.72 million last month —- suggesting that rising mortgage rates, record home prices, and the high cost of building materials are starting to bite. Economists polled by MarketWatch had expected housing starts to register a 1.75 million rate after factoring in for typical seasonal swings in demand.

The number of permits, meanwhile, slipped 3.2% to a 1.82 million rate.

What analysts say

While the Fed chief sees a potential pathway to bringing down inflation without a recession, “our sense is that Powell is being a bit more honest or realistic about the possibility that tightening might have to go so far that it tips the economy over the edge,” said Steve Barrow, head of G-10 strategy at Standard Bank, in a note.

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