10-year Treasury yields rise; yield curve steepens ahead of Powell testimony

NEW YORK- Benchmark 10-year Treasuries yields popped above 1.5% Tuesday as rising inflation expectations helped steepen the yield curve for the first time since mid-May.

The spread between 5-year and 30-year Treasury yields rose to 126.60 basis points, one day after hitting a low of 107.80, while the spread between 2 and 10-year Treasury yields reached 126.40 basis points after touching its lowest levels since February the day before.

The yield curve - a measure of future inflation expectations - had been falling since mid-May as investors bet that the Federal Reserve will act to clamp down on inflation as the global economy rebounds from the coronavirus pandemic. The central bank surprised some market participants with its hawkish turn at its policy meeting last week.

The 10-year yield rose to 1.4954% after touching 1.509% earlier in the day. Two-year yields, which are more sensitive to interest rate changes, dropped to 0.2382% while long duration 30-year bond yields rose to 2.1295%.

The Treasury market will likely remain volatile over the summer as investors look ahead toward the Fed's annual symposium at Jackson Hole, Wyoming in late August, analysts said.

"There remains a degree of collective disbelief in the outright level of yields despite the Fed’s less dovish pivot and the implication for the forward path of policy rates," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

The Fed last week signaled a potentially tougher stance on inflation and shifted projections for its first two rate hikes into 2023, sparking a selloff in U.S. stocks, boosting the dollar and flattening the Treasury yield curve in its fastest re-shaping since March 2020, according to Citi analysts.

Fed Chairman Jerome Powell is due to speak before Congress on Tuesday afternoon. Several other key Fed officials will be making appearances throughout the week.

(Reporting by David Randall Editing by Alistair Bell ) ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters Messaging: david.randall.thomsonreuters.com@reuters.net))