After seeing initial strength, treasuries gave back ground over the course of the trading day on Tuesday before jumping going into the close of trading.
Bond prices surged back into positive territory in late-day trading but closed well off their best levels. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, edged down by 1.6 basis points to 1.537 percent.
The spike seen late in the session came after Federal Reserve Chairman Jerome Powell indicated in remarks at the National Association for Business Economics annual meeting in Denver, Colorado, that the central bank intends to resume increasing the size of its balance sheet.
Powell cited unexpectedly intense volatility in wholesale funding markets, noting liquidity pressures in money markets in mid-September caused overnight interest rates to spike, with the effective federal funds rate briefly moving above the Fed’s target range.
The Fed responded by conducting temporary open market operations, which Powell said kept the federal funds rate in the target range and alleviated money market strains more generally.
“While a range of factors may have contributed to these developments, it is clear that without a sufficient quantity of reserves in the banking system, even routine increases in funding pressures can lead to outsized movements in money market interest rates,” Powell said.
“This volatility can impede the effective implementation of monetary policy, and we are addressing it,” he added. “Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.”
Powell pointed out that increasing the supply of reserves or even maintaining a given level over time requires the Fed to increase the size of its balance sheet.
“As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves,” Powell said. “That time is now upon us.”
The Fed chief stressed that the growth of the Fed’s balance sheet for reserve management purposes should not be confused with the large-scale asset purchase programs deployed after the financial crisis.
“Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy,” Powell said.
With regard to monetary policy, Powell reiterated his pledge to “act as appropriate” to support continued growth, a strong job market, and inflation moving back to the Fed’s symmetric 2 percent objective.
Meanwhile, traders largely shrugged off the results of the Treasury Department’s auction of $38 billion worth of three-year notes, which attracted modestly below average demand.
The three-year note auction drew a high yield of 1.413 percent and a bid-to-cover ratio of 2.43, while the ten previous three-year note auctions had an average bid-to-cover ratio of 2.49.
Looking ahead, the Treasury is due to announce the results of its auctions of $24 billion worth of ten-year notes on Wednesday.
Trading on Wednesday may also be impacted by reaction to more comments from Powell as well as the minutes of the Fed’s latest monetary policy meeting.
The material has been provided by InstaForex Company – www.instaforex.com