The 10-year U.S. Treasury yield hovered around its 14-month high on Friday after the Federal Reserve on Friday declined to extend a rule expiring at the end of the month that relaxed the supplementary leverage ratio for banks during the pandemic.
The rule allowing banks to hold less capital against Treasurys and other holdings was implemented to calm Treasury markets during the crisis and encourage banks to lend.
The decision could have some adverse effects, traders have warned, if in response banks sell some of their Treasury holdings. That could send yields even higher at a time when a rapid rise in rates is already unnerving investors.
The 10-year yield topped 1.7% on Thursday, a 14-month high, while the 30-year yield briefly jumped above 2.5%. The sharp rise in yields followed comments from the Federal Reserve and its Chairman Jerome Powell, indicating that the central bank would allow inflation to run hotter.
The 10-year yield began the year under 1%.
The Fed said it expected core inflation to hit 2.2% in 2021, but forecast it to be around 2% in the long run. Powell suggested the Fed was willing to let inflation tick higher if it helped improve the employment picture in the U.S.
Gary Pzegeo, head of fixed income at CIBC Private Wealth, pointed out on Thursday how this was part of the Fed’s newer policy framework, announced last summer, that “introduced a more inflation tolerant Fed intent on achieving full employment before tightening policy.”
“Reactions indicate that markets either see longer-term risks to inflation, or near-term risks of the Fed wavering from this new approach,” he said.
Mobeen Tahir, associate director of research at WisdomTree, told CNBC’s “Squawk Box Europe” on Friday that it was important to put the rise in Treasury yields in perspective.
“We’re talking about yields rising from levels so low that a year ago it would have been inconceivable that U.S. Treasury yields can actually go so low, but alas, equity markets don’t like yields rising very quickly and hence we’ve seen these jitters across the board,” he said.
There are no auctions scheduled to be held on Friday.
— CNBC’s Jeff Cox contributed reporting.