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Treasury Curve Steepens as Powell Warily Talks Taper, Rate Hikes

(Bloomberg) — Treasuries gained and the yield curve steepened as Federal Reserve Chair Jerome Powell continued to underscore risks to the economy even as he signaled that the central bank could begin paring its monthly bond purchases this year.

Powell also emphasized Friday at the Kansas Fed’s virtual Jackson Hole symposium that pulling back on bond buying wouldn’t necessarily mean interest-rate hikes would follow immediately.

Ten-year yields fell almost 3 basis points to about 1.32% and the yield curve reversed an early-session move that sent it to the flattest level in a year. The Fed chair’s long-awaited remarks kept intact the message traders already garnered from past comments by Powell and from the minutes of the central bank’s last policy meeting, in July — that most officials judged that it probably would be appropriate to begin paring the buying in 2021, even as the delta variant of the coronavirus spreads.

“On net, tapering remains on track and the next question is when it will be appropriate to hike,” BMO Capital Markets strategist Ian Lyngen wrote in a note. “This will be data-dependent and implicitly a function of path out of the pandemic and toward the new normal.”

The Fed is currently buying $120 billion a month in bonds, part of emergency measures introduced last year to support the economy and help markets function smoothly.

Powell said in his remarks that the economy has now met the test of “substantial further progress” toward the Fed’s inflation objective that he and his colleagues said would be a precondition for tapering the bond purchases, while the labor market has also made “clear progress.”

Money-market traders held steady Friday with pricing in the Fed’s liftoff from zero in the first quarter of 2023.

The yield curve, as measured by the gap between 5- to 30-year yields, was about 2 basis points steeper than Thursday’s closing levels, at about 111 basis points. The curve earlier Friday touched around 107 basis points amid comments from other Fed officials that were deemed on the hawkish side in terms of pushing for a quicker start to tapering.

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