NEW YORK, July 30 (Reuters) - Longer-dated U.S. Treasury yields jumped on Thursday to a 19-year high, extending a move that began after comments from U.S. Federal Reserve Chairman Kevin Warsh on Wednesday unsettled investors, concerned the Fed may not act aggressively to head off inflation.
The U.S. economy grew at a somewhat slower-than-expected rate in the second quarter, but stubbornly higher prices have kept bond prices under pressure, raising borrowing costs for consumers.
Gross domestic product increased at a 1.5% annualized rate in the second quarter, below the 2.1% estimate of economists polled by Reuters.
Yield moves, labor data and market commentary
Data from the Labor Department showed weekly initial jobless claims rose 9,000 to a seasonally adjusted 197,000, slightly below the 200,000 forecast, pointing to a labor market that remains on solid footing.
"The economy's doing fine - it's not rip-roaring too hot and it's not falling out of bed either," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin, Texas. "The overarching theme is the Fed. The strategy behind pulling back on forward guidance is forcing the market to take responsibility and enlisting the market in helping him do his job."
The yield on the benchmark U.S. 10-year Treasury note US10YT=RR rose 4.5 basis points to 4.667% after climbing to 4.712%.
The yield on the 30-year bond US30YT=RR jumped 6.9 basis points to 5.212% after rising to 5.244%, highest since July 13, 2007.
The 2-year US2YT=RR U.S. Treasury yield, which typically moves in step with Fed interest-rate expectations, shed 0.7 basis point to 4.229%.
"What Warsh is trying to get ahead of, what he's trying to do, is allow the markets to understand inflation and maybe get some credibility that the Fed is serious about this inflation fight," said Arnim Holzer, Global Macro Strategist at Easterly EAB.
"It's too early to know whether that's true or not, but there is a reality that investors are demanding a greater compensation for owning longer duration."
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 43.6 basis points after climbing to 44.4, its highest since May 29.
The breakeven rate on 5-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.241% after closing at 2.263% on Wednesday. The breakeven rate closed at 2.171% on Tuesday, lowest since November 2024.
The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.255%, indicating the market sees inflation averaging about 2.3% a year for the next decade.
Inflation and Fed outlook keep markets on edge
The Personal Consumption Expenditures Price Index (PCE) increased 3.7% in the 12 months through June, matching expectations, after advancing by an unrevised 4.1% in May.
The Fed's policy statement on Wednesday left rates unchanged, though three of the 12 policymakers dissented in favor of a rate hike. Comments from Warsh gave no guidance about the path of central bank policy aside from another pledge to bring down inflation, adding to uncertainty around the Fed outlook that caused long-dated yields to spike Wednesday.
Bank of America U.S. economist Aditya Bhave said in a note that markets responded to Warsh's press conference by "questioning the Fed's credibility," and that "the need to re-establish credibility increases the probability that the Fed will hike in September."
Markets are now only pricing in a 63.4% chance for a rate hike at the Fed's September meeting, according to CME FedWatch, down from 82.3% a week earlier.
Morgan Stanley's chief U.S. economist Michael Gapen maintained his call that the central bank will keep rates on hold this year as Warsh's comments "imply the bar to hike may be higher than some expected" and financial markets "likely came out of the meeting more confused than they went in."
Rate expectations for the Fed have whipsawed in recent weeks, in part due to the volatility in oil prices due to the ebbs and flows of hostilities in the U.S.-Iran war.
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