(Bloomberg) – U.S. Treasury yields jumped on Monday as weak demand for a two-year note auction sparked a fresh selloff that propelled major benchmarks more than 20 basis points higher – and a drives the 10-year rate up the most since the Covid crash of March 2020.
US inflation stuck near a four-decade high and a hawkish Federal Reserve now planning to push policy rates to at least 4.6% in 2023 are driving bearish market sentiment, with low liquidity exacerbating moves. A further spike in UK gilt yields, with key benchmarks up around 40-50 basis points, also added pressure to the global bond market.
Nominal and inflation-adjusted yields hit new multi-year highs, accelerating a deepening rout. The 10-year rose 24 basis points to 3.93% in New York, its highest level since April 2010. Treasury options flow was active and mixed with yields at extended highs. The benchmark US yield fell six basis points to 3.86% in Tuesday’s Asian session.
“The Fed is in a situation where it needs to go further and the market realizes that,” said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “If you step back and look at the big picture, the Fed really wants higher rates.”
The start of the Treasury curve came under pressure after two-year auction bonds sold at yields above the prevailing market rate at the time the auction closed, a sign that rising yields bonds is not enough to attract buyers. This sets a grim prognosis for upcoming five- and seven-year note sales this week, especially as month-end and quarter-end liquidity tends to be thinner.
Monday’s selloff pushed five-year yields up more than 20 basis points to around 4.19%, while seven-year yields rose 24 basis points to 4.11%, hitting a high. observed in 1993. A Bloomberg index of prevailing liquidity conditions in the US Treasury market has risen steadily in recent weeks and is just below its March 2020 peak.
In a sign of further tightening in financial conditions, the 10-year Treasury inflation-protected yield rose 31 basis points to 1.62% for the first time since April 2010. The five-year real yield climbed by 31 basis points to 1.91%. Rates for both maturities fell about three basis points on Tuesday.
Fears that Fed policy could push the economy into recession were signaled by the 30-year bond lagging on the sell, with its yield up 13 basis points to 3.74%. The spread between the two- and 30-year yields widened to minus 0.68 percentage points, the deepest inversion since 2000, before becoming flat again late in trading Monday. The spread on 2- and 10-year Treasury bills was minus 43 basis points, about 10 basis points closer to positive territory.
(Updated Treasury movements in the third and seventh paragraphs)
More stories like this are available at bloomberg.com
©2022 Bloomberg LP