- Bond yields plunged lower Tuesday following comments from Fed officials about a rate hike reprieve.
- Atlanta Fed President Raphael Bostic said he sees no need for further rate hikes to cool down the economy.
US Treasurys rallied Tuesday, taking a breather after a blistering sell-off, as more Federal Reserve officials suggested further rate hikes may not be needed.
The Israel-Hamas war also contributed to slipping yields as investors rushed to safe haven assets amid fears of a wider regional conflict.
After the market holiday on Monday, bonds climbed. Since prices and yields move inversely, the 10-year yield plunged to 4.63% on Tuesday from 4.78% on Friday, and the 30-year yield tumbled to 4.878% from 4.941%.
More than a year and a half of steady rate hikes has brought the fed funds rate to a 22-year high. But recent signs of resilient economic growth raised fears that central bankers may have to tighten even further to rein in inflation. That helped send yields soaring last month and earlier this month.
But on Tuesday, Atlanta Fed President Raphael Bostic he sees current interest rates as a viable path to bringing inflation down to 2%, noting that a lot of the Fed's policy impact is yet to materialize.
"I actually don't think we need to increase rates any more," he said in an interview with the American Bankers Association. "I think we are at a good place in that regard."
Bostic noted that the US has been in a long period of low interest rates, which is now changing. What's important right now, he said, is to find a "new equilibrium."
That came after Dallas Fed President Lorie Logan also hinted at a pause on rate hikes, saying Monday that high bond yields may do the job of slackening an economy that's running too hot.
That would make a Fed rate hike unnecessary, because high yields tend to crimp every corner of the economy, from housing to M&A deals to stock market performance.
"Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal," she said at the National Association for Business Economics meeting in Dallas. "Thus, if term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening to achieve the FOMC's objectives."
The term premium, which recently turned positive for the first time two years, can be described as the extra compensation traders get for investing in long-term bonds. Because the future is more uncertain, yields on long-term bonds trend higher.
Also on Monday, Fed Vice Chair Philip Jefferson echoed similar sentiments about the spike in bond yields.
"Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy," he said at the NABE meeting.