Daily Market Color February 20, 2025Long Term Yields Decline Following Comments from Treasury Secretary Bessent Yields continue gradual decline. Treasury yields fell 1-4 bps across a flattening curve today, largely driven by Treasury Secretary Bessent, who stated that re-allocation into longer term Treasurys is unattractive in the current environment. 2-year and 10-year yields are currently at 4.27% and 4.51%, respectively, with the spread between the two now just over +23 bps after a YTD high of +42 bps. Meanwhile, Walmart’s disappointing profit growth forecasts and 6.52% share price decline contributed to a weak session for equities, including a 1.01% DJIA sell-off. Treasury Secretary Bessent is wary about boosting long-term Treasury issuance. Scott Bessent said today in an interview on Bloomberg Surveillance that increased issuance of longer-term Treasurys is “a long way off.” He argued that inflationary pressures currently make termed-out debt unattractive, though he caveated that term preference will be “path dependent” due to the potential for inflation to slow. Bessent added that it would be “easier for me to extend duration when I’m not competing with another big seller,” alluding to the Fed’s ongoing quantitative tightening (QT) that drives yields higher. His comments come after yesterday’s FOMC minutes revealed that Fed officials are contemplating a slowdown in the pace of QT. Fed’s Musalem believes the risk for prolonged inflationary pressures is rising. St. Louis Fed President Alberto Musalem said today that monetary policy should remain “modestly restrictive” until inflation shows greater progress toward the Fed’s 2% long-term target. He also stated that his baseline scenario includes inflation moving closer to 2% alongside a resilient labor market, at which point the Fed can resume gradual rate cuts. However, Musalem fears that “the risks of inflation stalling above 2% or moving higher seem skewed to the upside,” which could delay further easing. He also argued that the risk of inflation stalling is greater than the odds of significant labor market deterioration.
