In credit, a risk-taking ebullience has taken hold. The lowest-rated traded company debt is outgunning safer assets.

Policymakers need more evidence that inflation is heading sustainably to the central bank's 2% goal before acting, he said.

During a contentious exchange on his second day of congressional testimony this week, the Federal Reserve chair drew a line between the central bank's response to last year's bank failures and its current capital proposal.

Jefferson voiced cautious optimism that inflation is headed lower despite a blip in January and said the Fed is likely to begin cutting interest rates later this year.

Federal Reserve Vice Chair for Supervision Michael Barr said Friday that Fed supervisors continue to draw on lessons learned from last March's bank failures—including heightened scrutiny—addressing risks banks currently face including firm asset growth, liquidity pressures and plummeting commercial real estate values.

The risk that inflation could remain stuck above their 2% target is guiding Fed officials' preference to keep interest rates where they are for now, even as investors have clamored for cuts.

She cited the increase in interest rates, higher vacancy rates thanks to shifting work patterns triggered by the pandemic and a wave of commercial real estate loans coming due this year.

Yields across the maturity spectrum climbed as much as 10 basis points on the day, reaching session highs after the ISM gauge of service-sector activity for January exceeded economist estimates.

A key Senator had urged Fed Chairman Jerome Powell to lower rates early this year, but although there's more consensus on making such a move, it now looks unlikely to happen until after the next meeting.

Yields moved in tandem — rising sharply in the immediate aftermath of the employment data before going on to swoon as investors used the rise in yields to snap up Treasuries.