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U.S. 10-Year Treasury Yields Hit 14-Month High, Pressuring Powell, Fed

Benchmark 10-year bond yields passed 1.67% early Wednesday as markets pressed their inflation case ahead of today's crucial Federal Reserve meeting.

U.S. 10-year Treasury bond yields hit a fresh 14-month high Wednesday as investors press the case for Federal Reserve action against rising market interest rates and surging inflation expectations. 

Benchmark 10-years note yields were marked at 1.671% in early Wednesday trading, the highest since February 2020 and level that extends their year-to-date increase to around 75 basis points. 

30-year bonds were also on the move, rising to 2.428%, the highest since November of 2019.

Interest rate traders are also boosting their forecasts for near-term inflation, taking the so-called breakeven rate between five-year Treasury bonds and five-year inflation protected securities, a key market gauge for consumer price increases, was marked at 2.6% Wednesday, the highest since at least 2008 and firmly ahead of the Fed's 2% inflation target.

In fact, global fund managers are more worried about faster inflation than they are about the pace of coronavirus infections for the first time in more than a year, Bank of America's benchmark survey indicated Tuesday,  noting that a 10-year yield of 2% could spark a 10% correction in the S&P 500.

Federal Reserve Chairman Jerome Powell, however, isn't likely to cede to market demands when he speaks to the media at 2:30 pm Eastern time, even as the central bank boosts its growth forecasts amid a renewed drop in coronavirus cases and the tailwind of the $1.9 trillion American Rescue Act.

"Powell will acknowledge the improving economic outlook on the back of the dramatic fall in COVID cases and hospitalizations," said Ian Shepherson of Pantheon Macroeconomics. "Along with many of his FOMC colleagues, he seems comfortable with the line that the increase in yields is mostly a signal of rising growth expectations, so it does not need a response in the form of more QE or a increase in the weighted average maturity of purchases."

"But we expect Powell to argue forcefully that talk of a near-term policy response to events which have not yet happened, and might not happen at all, or might happen much later than currently expected, is premature."