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Bond Report: Treasury curve inverts more deeply as yields push higher and investors await Fed minutes this week

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Treasury yields moved higher Monday as investors weighed remarks by Federal Reserve officials and awaited the release later this week of minutes of the central bank’s March meeting.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.410%

was at 2.402%, compared with 2.374% at 3 p.m. Eastern on Friday. Yields and debt prices move opposite each other.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.452%

stood at 2.449% versus 2.43% on Friday afternoon, which was its highest based on 3 p.m. levels since March 19, 2019, according to Dow Jones Market Data.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.472%

stood at 2.469%, up from 2.422% late Friday.

What’s driving the market?

Treasury prices were under renewed pressure Monday, pushing up yields and continuing a brutal selloff for government debt that marked the first quarter, which ended Thursday.

See: U.S. government bonds just suffered their worst quarter of the past half century: Here’s why some investors may not be fazed

The 2-year yield moved above the 10-year yield last week, inverting a closely watched measure of the yield curve — a phenomenon that’s preceded past recessions with few false positive readings. However, a persistent inversion is needed to send a convincing signal, economists say. And there’s a debate over which yield curve signal is likely to be most reliable going forward.

Read: Why an inverted yield curve is a bad tool for timing the stock market

Still, the move, which has come as short-term rates have soared in anticipation of aggressive Fed rate increases, underlines investor worries over the potential the Fed’s efforts to rein in hot inflation readings could result in a hard landing for the economy.

Investors were weighing weekend remarks by Fed officials. New York Fed President John Williams on Saturday said the central bank could begin begin reducing its balance sheet as soon as its May 3-4 policy meeting to address inflation that has become “particularly acute.”

San Francisco Fed President Mary Daly, in an interview with the Financial Times, said the case for a 50 basis point rate increase, rather than the usual 25 basis point increment, has strengthened.

“The case for 50, barring any negative surprise between now and the next meeting, has grown,” Daly said in the Friday interview. “I’m more confident that taking these early adjustments would be appropriate.”

The weekend saw grim headlines and images out of Ukraine as Russian forces pulled back from positions near Ukraine’s capital, Kyiv. So far, the bodies of 410 civilians have been found in towns near the capital that were recently retaken from Russian forces, said Ukraine’s prosecutor-general, Iryna Venediktova.

The images prompted several European leaders to call for tougher sanctions against Moscow.

Minutes of the Fed’s Feb. 6 policy meeting, due Wednesday afternoon, will be a data highlight this week. On Monday, investors will get a look at February factory orders at 10 a.m.

What are analysts saying?

“While the news flow remains tilted towards higher rates, so much is priced in at this point,” wrote analysts at UniCredit.

“In the U.S., money market forwards are anticipating an increase in the key rate to around 3% in 2023 and in the euro area, money markets are pricing in a complete tightening cycle until early 2024. Therefore, we might see another week with yields at elevated levels and massive doses of intra-day volatility,” they said.

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