'Hawkish' Powell testimony dents rally



By Karen Pierog

CHICAGO, Nov 30 (Reuters) - Testimony by Federal Reserve Chair Jerome Powell on Tuesday struck a hawkish chord in the U.S. Treasury market, pushing up shorter-term yields, which had fallen earlier in the session as part of an across-the-curve rally sparked by concerns over the Omicron coronavirus variant.

Powell told a U.S. Senate committee the term "transitory" to characterize inflation should probably be retired. He also said the Fed should consider accelerating the tapering of its bond purchases at its upcoming December meeting.

The benchmark 10-year note yield US10YT=RR , which fell to its lowest level since Sept. 24 at 1.412%, was last down 8.5 basis points at 1.4443%. The 30-year yield US30YT=RR , which dropped to its lowest level since late January at 1.776%, was last 8.5 basis points lower at 1.7951%. Yields move inversely to prices.

The shorter end of the curve reversed course and rose with the two-year yield US2YT=RR , which reflects short-term interest rate expectations, last up 5.1 basis points at 0.5611%.

A closely watched part of the curve that measures the gap between yields on two- and 10-year Treasury notes US2US10=TWEB flattened, with the spread falling to as low as 87.80 basis points.

"Powell came off as much more hawkish than many were assuming given the variant risk," said Ben Jeffery, an interest rate strategist at BMO Capital Markets in New York, adding that the market was thinking "a sooner end to tapering might imply a sooner liftoff for rate hikes."

Futures on the federal funds rate 0#FF: , which track short-term interest rate expectations, on Tuesday priced in an 86% chance of a quarter-point tightening by the Fed by June, up from 74% on Monday, with investors fully pricing in that rate hike by July.

John Canavan, lead analyst at Oxford Economics in New York, said yields on the shorter end of the curve rose on heightened interest rate-hike expectations, while long-end yields stayed lower due to curve flattening trades, a risk-off sentiment that sent stocks down, and demand from month-end portfolio rebalancing.

"Fed Chair Powell let us know that despite any concerns they have about the variant, it's not enough to get them to change the trajectory of their policy until we see some actual significant economic impacts from the variant," Canavan said.

Earlier in the session, yields across the curve tumbled after Moderna's CEO told the Financial Times Link that existing vaccines would likely be less effective against the new variant and it would be a risk to completely shift production to an Omicron-targeted dose while other variants remained in circulation.

The five-year note and 30-year bond US5US30=TWEB yield curve also flattened. The gap between the two was last 7 basis points narrower at 63.30 basis points.

The five-year breakeven inflation rate tumbled to a one-month low of 2.79%. US5YTIP=RR .

November 30 Tuesday 4:20PM New York / 2120 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 0.055

0.0558

0.003 Six-month bills US6MT=RR

0.1025

0.104

0.005 Two-year note US2YT=RR

99-225/256 0.5611

0.051 Three-year note US3YT=RR

99-192/256 0.8358

0.024 Five-year note US5YT=RR

100-110/256 1.1612

-0.024 Seven-year note US7YT=RR

100-216/256 1.3731

-0.055 10-year note US10YT=RR

99-92/256

1.4443

-0.085 20-year bond US20YT=RR

102-68/256 1.8635

-0.076 30-year bond US30YT=RR

101-216/256 1.7951

-0.085

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

23.50

-0.25

spread

U.S. 3-year dollar swap

22.75

0.00

spread

U.S. 5-year dollar swap

12.25

0.75

spread

U.S. 10-year dollar swap

7.25

2.25

spread

U.S. 30-year dollar swap

-16.00

1.50

spread


Reporting by Karen Pierog and Tom Westbrook; additional reporting by Dhara Ranasinghe, Yoruk Bahceli and Gertrude Chavez-Dreyfuss; Editing by Barbara Lewis and Leslie Adler

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