The U.S. bond market will be watching for ongoing reassurance from the U.S. Federal Reserve that it will maintain its bond purchases for the foreseeable future or risk a disorderly rise in yields.
Yields spiked to 10month highs this month after Democrats won control of the U.S. Senate, increasing bets on higher fiscal spending, rising inflation and possibly a faster economic recovery.
Speculation also grew that the Fed would be quicker to pull back its support of the U.S. economy, possibly even tapering bond purchases this year.
But the yield increase, with 10year yields jumping more than 20 basis points in a week to 1.187, prompted Fed officials to push back and yields have retraced to 1.036.
Fed Chair Jerome Powell said on Jan. 14 it is too early for the central bank to discuss changing its monthly bond purchases.
Powell was full throttle on the message, said Lou Brien, a market strategist at DRW Trading in Chicago. Powell does not want the market or the public to make presumptions about the end of Fed accommodation; he wants to be the one who makes the incremental adjustments to the outlook.
When the economy improves substantially, and we can see that clearly, we will let the world know, communicating very clearly to the public, and do so well in advance of active consideration of any policy changes, Powell said.
His ability to stop the market from frontrunning potential Fed moves will be key for whether future yield increases become disruptive, analysts…