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Yield on 2-Year Treasury Note Rises as Investors Weigh Potential for Higher Rates

Spencer Platt | Getty Images

The yield on the 2-year Treasury note climbed again on Wednesday after topping the 5% level on Tuesday as comments from Federal Reserve Chairman Jerome Powell seemed to suggest higher rates ahead.

The yield on the policy-sensitive 2-year Treasury was last was last up 5 basis points at 5.062%, after topping the 5% level earlier in the week. The 10-year Treasury traded less than a basis point higher to 3.983%.

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Yields and prices move in opposite directions and one basis point is equivalent to 0.01%.

Investors assessed the outlook for central bank monetary policy after Powell said that interest rate hikes could go higher than expected on the back of strong economic data.

Speaking before Congress on Tuesday and Wednesday, Powell also indicated that central bank officials would consider speeding up the pace of rate hikes again. Many investors took that as a sign that a 50 basis point rate hike is an option at the Fed's next meeting.

Wall Street had been hoping for the Fed to slow the pace of rate hikes or pause them this year as concerns about whether elevated interest rates would cause the U.S. economy to contract spread. Now, at least 75% of traders anticipate a 50 basis point hike at the next meeting, according to CME Group's FedWatch tool.

"The Treasury market has definitely been listening to the recent hawkish Fed narrative that rates will need to be higher for longer," said Lawrence Gillum, fixed income strategist for LPL Financial. "Front end maturities, which are most sensitive to Fed rate hike expectations, have sold off dramatically over the last few days as markets are now pricing in a higher terminal fed funds rate."

ADP private payrolls data showed businesses add more jobs than expected in February, affirming the case that the economy continues to run hot. January's JOLTS job openings data, meanwhile, declined slightly but continued to outweigh available workers.

A tight labor market is often associated with high levels of inflation. Investors are looking ahead to Friday's nonfarm payrolls report, which they will scan for hints about the state of the U.S. economy and the impact of the Fed's hikes.  

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