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Treasuries Keep a Grip on Gains as Omicron May Delay Fed Hikes



© Reuters.

(Bloomberg) — Treasury yields fluctuated close to Friday’s lows as investors stood by bets the Federal Reserve will think twice about hiking interest rates amid concern over the impact of the omicron variant on the recovery.

The two-year yield is right where it ended last week’s holiday-abbreviated session, while rates on longer-term securities are only a few basis points higher since then. Fed futures signal the first hike may not happen until September next year, compared with last Wednesday’s pricing which saw traders plump for June. 

The investor caution was mirrored in other asset classes with muted rebounds seen in Asian and European equities this week and well below levels seen before Friday’s plunge. The was unable to retrace all its post-Thanksgiving losses on Monday.

Fed Chair Jerome Powell, in his first public remarks on the new variant, did little to prevent speculation that its impact might slow rate increases, saying developments pose risks to the central bank’s employment and inflation mandates. Governments have moved swiftly to impose travel restrictions — just as the holiday season gets underway in many economies — fueling concern the new strain will shake consumer and corporate confidence. 

“With each day of uncertainty, some economic damage is being dealt,” said Eugene Leow, rates strategist at DBS Bank Ltd. in Singapore. “It will be difficult to reclaim 1.6% for 10-year yields until we get clarity on omicron.”

Powell Says Omicron Adds Economic Risks, Inflation Uncertainty

The 10-year rate was little changed at 1.50% Tuesday, well below Monday’s peak of 1.56% and closer to Friday’s 1.47% low. The yield on two-year Treasuries rose two basis points to 0.51%. 

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U.S. yields slid Monday following the release of Powell’s written remarks, which were published ahead of a Congressional appearance Tuesday. That was even as President Joe Biden said he doesn’t expect the U.S. will reintroduce lockdowns.

A nervous tone persists across markets, as investors wait for more details on omicron. While the South African doctor who raised the alert has observed mild illness in people infected with the variant, the World Health Organization warned it could fuel a fresh surge in infections with severe consequences.

(Updates throughout)

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