U.S. Treasury yields remained modestly higher on Wednesday as investors assessed remarks by Federal Reserve Chairman Jerome Powell and the central bank’s assessment that the U.S. economy has “made progress” on the conditions needed to taper bond purchases, but not enough to start.

What yields are doing

The 10-year Treasury note’s yield

rose 2.4 basis points to 1.259%, versus 1.235% on Tuesday at 3 p.m. Eastern Time.

The 30-year Treasury bond rate

climbed 2 basis points to 1.910%, compared with 1.890% a day ago.

The 2-year Treasury note’s yield

rose less than 1 basis point to 0.209%, versus 0.204% on Tuesday.

Fixed-income drivers

Fed officials voted unanimously to keep the target range for the fed funds rate between zero and 0.25%, while saying it will continue to use coming meetings to assess whether enough economic progress has been made to start tapering the central bank’s $120 billion in monthly Treasury and MBS purchases.

At a post-meeting news conference, Powell said that policy makers are still a ways off from raising interest rates and haven’t yet settled on the timing, pace or composition of any future tapering in bond purchases. The chairman also maintained that recent high U.S. inflation readings are tied to sectors which reflect the reopening U.S. economy, and that price pressures don’t appear to be spreading broadly.

Treasury yields have been anchored lower despite recent inflation data — leading many to speculate that buying in Treasurys has been due to other factors, including reduced issuance, or that debt investors believe inflation will be short-lived.

Prior to the release of the Fed’s statement, a report showed that the U.S. trade deficit in goods rose 3.5% in June to a record $91.2 billion, reflecting a strong appetite among Americans for imports as the U.S. economy recovers from the coronavirus.

In addition, Treasury’s auction of 2-year floating rate notes garnered “very strong indirect demand,” according to Jefferies economists Thomas Simons and Aneta Markowska.

What economists and others say

“Powell’s job at the moment is like trying to turn a cruise ship in a bath tub: He has very little room for maneuver and wants to avoid any sharp turns at the risk of unsettling markets,” Aberdeen Standard Investments Deputy Chief Economist James McCann said in e-mailed comments. “The Fed has made clear that it is making progress towards its policy goals, but that’s as far as the ship is going to turn for now, especially with risks from the delta variant starting to emerge. We will have to wait until at least the Jackson Hole symposium to get a clearer signal on when the Fed may begin tapering.”

With the economic recovery playing out and inflation continuing to rise, “it would be thought the Federal Reserve would have no choice but to act sooner or later,” portfolio manager Hinesh Patel of Quilter Investors said in an e-mail. “But Jerome Powell and company like where the economy is heading and seem content to wait until the data becomes even clearer.”

Meanwhile, Dustin Qualley, a senior portfolio manager for Build Asset Management, says that “the Fed needs to reckon with stronger-than-anticipated inflation data.” “Realized inflation has come in higher than street consensus estimates for the past several months,” though market-based measures of inflation expectations remain well-anchored,” he said in emailed comments. “You can only use the word ‘transitory’ for so long before it loses its meaning.”

“As expected, the Fed maintained its accommodative stance by keeping short term interest rates near zero and continuing its bond-buying programs as-is,” Lawrence Gillum, a fixed-income strategist for LPL Financial, wrote in an e-mail. “The Fed acknowledged that the economy has made progress towards meeting employment and inflation goals so we’re likely getting closer to an official tapering announcement, but we still think September is when that is likely to take place. That the committee didn’t really acknowledge the pick-up in COVID-19 cases due to the delta variant was somewhat surprising and maybe a bit more hawkish than expected but overall, the decisions were in-line with our expectations.”

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