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Bond Report: Treasury yield curve flattening accelerates


Yields on 10-year Treasury notes and 30-year bonds slipped on Monday, as buyers returned to government debt following last week’s brutal selloff. Meanwhile, one part of the yield curve inverted for the first time since 2006.

Yield moves

The yield on the 10-year Treasury note

was at 2.476% at 3 p.m. Eastern, down from 2.491% at the same time Friday. Based on 3 p.m. levels, the yield on Friday was the highest since May 6, 2019. The yield rose 34.5 basis points last week, its largest weekly rise since the week ended Sept. 13, 2019, according to Dow Jones Market Data.

The 2-year Treasury note yield

stood at 2.34% versus 2.299% on Friday afternoon, which was also its highest since May 6, 2019. The short-dated Treasury yield jumped 34.4 basis points last week for its biggest weekly rise since the week ended June 5, 2009.

The 30-year Treasury bond yield

was 2.572%, down from 2.603% late Friday, when it traded at its highest since July 25, 2019. The long bond’s yield rose 18.6 basis points last week.

Market drivers

Portions of the yield curve, a line plotting the difference between rates across maturities, continued to invert, with the yield on the 5-year note at 2.549% and the 3-year at 2.56%, surpassing the 10-year rate. The 5-year yield briefly traded above the 30-year rate, marking the first inversion of that portion of the curve since 2006, according to Dow Jones Market Data.

An inversion of the 10-year/2-year spread is seen as a reliable warning sign of future recession. The 10-year yield remains above the 2-year yield for now.

Read: The yield curve is speeding toward inversion — here’s what investors need to know

This year’s selloff in Treasurys accelerated last week, sharply pushing up yields, which move in the opposite direction of prices. Government bonds are on pace this year to produce their worst returns since 1949, according to a note on Friday from Bank of America, which tracked global bonds weighted by world gross domestic product.

Treasury yields jumped last week as expectations for half-point rate increases from the Federal Reserve grew following remarks by Chairman Jerome Powell and other policy makers. Powell said last Monday that the central bank was prepared to lift rates by more than the usual quarter of a percentage point increment if necessary to rein in inflation, a position echoed by some other policy makers.

Meanwhile, measures of market liquidity have showed signs of stress in the Treasury market all month so far.

In One Chart: U.S. Treasury market plagued with illiquidity as government bonds suffer worst week in years

A Financial Times report Monday afternoon that said Russia was prepared to let Ukraine join the European Union if it remained nonaligned militarily was credited by analysts with lifting overall investor risk appetite.

See: Biden says he was expressing ‘moral outrage’ over Putin, not stating a policy change

Overseas on Monday, China began locking down most of Shanghai, the nation’s financial capital and a city of 26 million, as a coronavirus outbreak surged. Oil futures fell sharply in response on expectations the lockdown will undercut Chinese demand for crude.

U.S. data released Monday showed that the U.S. trade deficit in goods fell slightly in February to $106.6 billion to mark the first decline in three months, but the gap stayed near an all-time high.  

On the supply front, the Treasury sold $50 billion of 2-year Treasury notes, which “could have gone worse” considering market volatility, said Thomas Simons, money market economist at Jefferies, while a sale of $51 billion in 5-year notes was “quite strong, but only in the context of a very weak market.”

What analysts say

“The lackluster takedown of the 2-year auction has reinforced the flattening tone and we’re certainly sympathetic to the reluctance to be aggressive buyers of the front-end of the curve with the Fed in full-hawkish mode,” wrote Ian Lyngen and Benjamin Jeffery, strategists at BMO Capital Markets, in a note.

Fed-fund futures continues to price in 245 basis points of rate increases by year-end, exceeding the Fed’s so-called dot-plot forecast, “although consistent with the angst that’s sure to follow in the event Powell’s 50 bp hike in May comes to fruition,” they wrote, noting that the continued flattening of the 2-/10-year curve means “concerns regarding the potential for a recession have once again entered the broader market discourse.”

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