By Matt Tracy
Feb 7 (Reuters) - Benchmark 10-year U.S. Treasury yields
were slightly higher on Wednesday after Federal Reserve Chair
Jerome Powell said interest rates may need to move higher than
expected if strong economic data threatens progress in lowering
inflation.
Speaking before the Economic Club of Washington, Powell
declined several times to say explicitly that last week's
surprisingly strong employment report would necessarily force
the U.S. central bank's benchmark interest rate higher than the
5.00%-5.25% range currently anticipated.
There is a "significant road ahead" before the Fed could
begin rate cuts, he added.
U.S. employers added 517,000 jobs in January, the Labor
Department reported on Friday. Meanwhile, the unemployment rate
edged down to a 53-year-low of 3.4%.
However, Powell's comments were less hawkish than market
participants expected, confirming the view of many that the Fed
was unlikely to hike rates beyond the 5.00%-5.25% band.
"He expects they're not going to be cutting rates anytime
soon, but that there is a good path, that they're accomplishing
what they need to accomplish," said Shawn Cruz, head trading
strategist at TD Ameritrade.
"That feeling that they would go even higher than some
expected is going away, so it's going to help markets," he said.
Benchmark 10-year yields fell to a session low
of 3.597% after Powell's comments before rising as high as
3.681%, the highest level since Jan. 6. Two-year yields were last at 4.426%, after reaching 4.493% on Monday,
also the highest since Jan. 6.
Economists at Morgan Stanley updated their rate-hike
expectations for May's Fed meeting by an additional 25 basis
points, and continue to expect the first rate cut in December.
The Treasury Department sold $40 billion in three-year notes
to weak demand on Tuesday, the first sale of $96 billion in
coupon-bearing supply this week.
Interest in the notes was likely negatively impacted by the
sale occurring at the same time as Powell's comments.
The notes sold at a high yield of 4.073%, more than 3 basis
points above where they had traded before the auction, and the
bid-to-cover ratio was below average at 2.33 times.
The Treasury will also sell $35 billion in 10-year notes on
Wednesday and $21 billion in 30-year bonds on Thursday.
(Reporting by Matt Tracy in Washington; Additional reporting by
Karen Brettell and Carolina Mandl in New York; Editing by Paul
Simao)
