Skip to main content
Complete Olympic Games coverage at your fingertips
Your inside track on the Olympic Games
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Complete Olympic Games coverage at your fingertips
Your inside track onthe Olympics Games
$1.99
per week
for 24 weeks
// //

After a searing U.S. bond selloff, markets are laser-focused on Federal Reserve Chair Jerome Powell’s next move.

But while investors will be closely watching the Fed chief, due to speak Thursday at a Wall Street Journal conference , for any hints of concern about last week’s jump in bond yields, they see a high bar for the U.S. central bank to actually take action. Thursday’s event will be Powell’s last outing before the Fed’s policy-making committee convenes March 16-17.

“We’re probably going to hear an acknowledgement that they’re keeping a close eye on things,” said Meghan Swiber, U.S. rates strategist at Bank of America. “It’s doubtful we’ll get the additional step where we hear clearly and precisely what they have in mind to address them.”

Story continues below advertisement

Swiber said of particular interest will be whether the Fed addresses short-dated yields nearing zero as yields at the long end spike. She said the “Twist” maneuver “is really the optimal solution.”

Operation Twist, in which the central bank shifts bond purchases to the long end of the yield curve, was used in the early 1960s, when the Fed sold shorter-dated debt to buy longer-dated debt to help lift the United States out of a recession. It was also used in 2011 when the Fed, which had already anchored shorter-dated debt by holding interest rates at zero, used asset purchases to lower long-term rates.

But there are obstacles to Fed intervention.

“The absolute level of real yields is still quite low,” said Erin Browne, portfolio manager at Pimco. “Yes, there was a mini selloff. But from the Fed’s perspective, when you look at financial conditions ... they were basically unchanged for most of last week.”

Though rising yields can increase the cost of borrowing for companies and individuals, the recent trend reflects an improving economic outlook, possible evidence the Fed’s policy is working. The 10-year Treasury yield hit a one-year high of 1.614% last week.

“We could see a renewed Operation Twist if economic and financial market conditions deteriorated, but the evidence for such deterioration is scant,” wrote Standard Chartered strategists in a research note on Wednesday.

What’s more, the Fed is unlikely to move unless absolutely necessary. “The Fed doctrine has always been: do the least you can to get the job done,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.

Story continues below advertisement

On Tuesday, Fed Governor Lael Brainard, noting the rise in yields, said she would be concerned if she saw disorderly conditions or persistent tightening in financial conditions.

Subadra Rajappa, head of U.S. rates strategy at Societe Generale, said the Fed might be quicker to bring down yields if there is a meltdown in risk assets.

“This tantrum seems very localized to the bond market,” she said.

Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments, said he is closely watching investment-grade credit spreads. If they widen, he expects the Fed to sound more concerned, “but not before then.”

More upwards pressure on yields is likely to come from the U.S. Treasury’s issuing approximately $4 trillion in government debt in 2021, according to ING Bank. The Fed’s monthly purchases currently total $120 billion.

“If the Fed doesn’t do something, then it’s only a matter of time, because the supply just keeps coming,” said Patrick Leary, chief market strategist and senior trader at broker-dealer Incapital.

Story continues below advertisement

Still, high demand from foreign investors due to the relative attractiveness of U.S. debt could eventually cap the rise.

“I think once you get to 1.75% or 2% level, there is going to be pretty chunky demand. So that will keep the back end contained,” said Pimco’s Browne.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies