Yield for 10-year U.S. government debt snaps 4-day skid but Treasury rates mostly hold ground near 3-week lows

Wednesday’s action marked a fifth straight slide for yields in the long bond, matching its longest such yield slump ended May 6. The 10-year snapped a four-session skid.

What drove the debt market?

While Fed officials have reiterated their intention to maintain low interest rates and a bond-buying program in recent weeks, some have suggested in recent days that they may be starting to consider the timing of a tapering of asset purchases, while trying to engineer a withdrawal of monetary support that doesn’t elicit a tantrum on Wall Street.

On Wednesday, the Fed’s Vice Chairman for Supervision, Randal Quarles, said it soon will be time for Fed officials to think about slowing the central bank’s pace of its bond buying stimulus, if the economy continues to improve at its current pace.

“I am quite optimistic about the path of the economy,” Quarles said in written testimony for the Senate’s Banking Committee on the U.S.’s economic outlook. He said that he expects inflation to temporarily exceed the Fed’s 2% target amid healthy economic activity and declining unemployment, powered by vaccinations in a snapback of business activity from the COVID pandemic.

Comments from Quarles come after the Fed No. 2 Richard Clarida said that policy makers can execute a “soft landing” for financial markets in reducing its asset purchases, speaking to Yahoo Finance Tuesday.

Some central banks around the world are getting ready to trim their monetary accommodations. New Zealand’s central bank held interest rates at a record low of 0.25% on Wednesday and maintained its quantitative asset-purchase program, but implied that it could begin to raise interest rates in September of next year.

Meanwhile, analysts also were watching the European Central Bank, which may begin discussions centered on slowing its emergency bond purchases.

German bond yields, for example, which hit a two-year low earlier this month, have been rising amid a sense that the ECB ultimately may need to take its foot off the monetary gas as the vaccine rollout helps to bolster the eurozone economy’s COVID recovery.

The 10-year German bond TMBMKDE-10Y, -0.202% stood at -0.202%, compared with a recent intraday low of around -0.7 on May 19.

Separately, an auction of 5-year Treasury notes TMUBMUSD05Y, 0.784% was well received. The auction stopped though 0.6 basis point of where the “when issued” level was bid at 1 p.m. Eastern. A stop-through indicates by how much the highest yield the Treasurys sold in the auction is below the highest yield expected when the auction began, known as the “when issued” level. 

What did strategists say?

“As we noted in our preview, demand for short- and intermediate-term Treasuries is very robust at the moment. Whether due to the lack of supply at the front-end spilling over into the coupon sector, or investors are looking to cover shorts ahead of the long weekend and upcoming payroll data next Friday,” wrote economists Thomas Simons and Aneta Markowska, in a Wednesday research note.