Treasury yields bounce after Beige Book highlights inflation pressures

Treasury yields rose Wednesday after the Federal Reserve’ Beige Book highlighted growing wage pressures from a tight labor market, an environment that should keep the central bank on track to raise rates at its pace of one hike every three months.

The 10-year Treasury note yieldTMUBMUSD10Y, +0.32% rose 1.3 basis points to 2.875%, while the 30-year bond yieldTMUBMUSD30Y, +0.62% picked up 1.9 basis points to 2.989%. The 2-year note yieldTMUBMUSD02Y, -0.47% was down 0.4 basis point to 2.611%, retaining its yield peak near 2008.

Bond prices move in the opposite direction of yields.

The bond market focused on signs of labor shortages and wage pressures after the Fed’s Beige Book report, a survey of executives and businesses throughout the Fed’s districts. Companies reported difficulties finding qualified workers amid rising costs of commodities and raw materials.

See: Worker shortages, rising costs hemming in a U.S. economy bursting at the seams, Fed’s Beige Book finds

Economists say for inflation to trend higher in the long-term, the labor market’s tightness will need to translate into wage gains. Inflation is doubly bearish on bond prices as it erodes the value of bond’s fixed-interest payments, and can accelerate the central bank’s pace of monetary tightening, compelling selling in long-dated Treasurys as investors await richer yielding offerings.

Investors also watched Powell’s testimony in front of the House Financial Services Committee. Powell repeated the need for gradual rate increases and answered questions on the reduction of its balance sheets. Powell said it wasn’t clear when the central bank should stop winding down its bloated portfolio of securities, a legacy of the Fed’s fight to stimulate growth after the financial crisis, which stands presently at more than $4 trillion.

See: For the first time, Powell says more rate increases are right path ‘for now’

On the data front, housing starts for June came in at a 1.173 million annual pace, a nine-month low, well below the 1.303 million consensus estimate form economists polled by MarketWatch.

The Treasury International Capitol Report showed foreign holdings of Treasurys had risen to $6.214 trillion in May from $6.169 trillion the previous month. Though the data could signal stronger appetite for Treasurys, the uptick in the value of foreign holdings could reflect how U.S. government bonds rallied in May, when the benchmark 10-year yield fell sharply from a seven-year high of 3.12% to end at 2.82% for the month.

Read: Stock investors should not fear the inverted yield curve, strategist says

“We think it’s more critical to watch the labor market in this point in time. We have a lot of interest in labor shortages and how is that going to affect the Fed, more so than the trade fears. If you look at tariff effects, they’re hard to measure,” said Victoria Fernandez, chief market strategist for Crossmark Global Investments.

“The labor issue is something the Fed is keenly watching, there’s a lot of labor shortages, and most of the companies are saying they don’t have the workers they need,” said Fernandez.

The German 10-year bond yieldTMBMKDE-10Y, -1.04% is down 0.4 basis point to 0.282%. German sovereign debt serves as a proxy for the eurozone bond market.

The U.K. 10-year government bond yieldTMBMKGB-10Y, -2.89% slipped 3.5 basis points to 1.226%, according to Tradeweb data, after British inflation remained at a one-year low of 2.4% in June. That could weaken the case for a rate increase from the Bank of England at the next meeting of its Monetary Policy Committee in two weeks.

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