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How Jay Powell explains the bond market

·Anchor
·3-min read
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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Thursday, July 29, 2021

Things happen in markets, according to the Fed chair

The Federal Reserve wrapped up its latest two-day policy meeting on Wednesday, and offered investors a few surprises. 

As Yahoo Finance's Brian Cheung notes, the Fed's statement and subsequent press conference from Fed chair Jerome Powell "hinted that the U.S. economic recovery is getting closer to a place where it may not need as much monetary support." 

But that day is not today. 

So dedicated Fed-watchers now turn their attention to the Jackson Hole Economic Symposium later next month, and await Powell's comments on when (and if) the central bank might begin altering its pace of asset purchases. 

And while most of the questions Powell faced Wednesday revolved around inflation and how long transitory pricing pressures might last, woven into this conversation was a discussion of what's been gnawing at the Treasury market over the last several weeks. 

When the Fed released its June policy statement on June 16 and released a projection for future interest rates that was more aggressive than investors had anticipated, the 10-year Treasury yield was sitting near 1.6%. As of Wednesday, the 10-year yield was just below 1.3%. 

And this move lower in Treasury yields has coincided with a resurgence in the big cap tech trade, a fade in the re-opening trade, and plenty of investor discomfort in both the equity and fixed income markets over the last several weeks. 

"In terms of what's been happening in bond markets, I don't think there's a real consensus on what explains the moves between the last [Fed] meeting and this meeting," Powell said Wednesday. 

"We've seen long-term yields go down significantly," Powell added. "Some of it is a fall in real yields, which may have been connected to, some speculate...sentiment around the spread of the Delta variant and concerns about growth."

The 10-year real yield, which reflects what investors expect the inflation-adjusted return on a 10-year note purchased today will be over the next 10 years, is currently near a record low of around -1.1%. But as Powell noted, there is also plenty about the recent move in Treasury yields that cannot — and perhaps need not — be explained.

"And there are also so-called technical factors," Powell said, "which is where you put things that you can't quite explain. I don't see in any of that that there is anything that really challenges the credibility of our framework." 

And in this response, we think Powell outlines how deciphering financial market moves involves a balance of prescription and description. It is descriptive to note that Treasury yields have declined in the last two months with some real yields falling to record lows. 

Offering a prescription — or a unified, definitive account of why such-and-such happened — will always prove more elusive. And may end up being flat out incorrect. 

Investors focused on timing swings in markets and profiting from these changes through time will, of course, have stories to tell about what is moving where and why. These stories are what keep the lights on at Yahoo Finance, and elsewhere across the financial world. 

But Powell's vantage point on markets is one that allows the Fed chair to note changes in prices and monitor situations carefully. And as Powell said Wednesday, "we're prepared to use our tools as appropriate." 

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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