U.S. government bond yields jump as inflation expectations rise to 3½-year high


Long-dated Treasury yields early Thursday traded at their highest levels in nearly a month, but shorter maturities saw a slight pullback in rates, as inflation expectations rose to the highest level in about three years.

How are Treasurys performing?

The benchmark 10-year Treasury note yield

TMUBMUSD10Y, +1.42%

 rose 4.6 basis points to 2.914%, after yields surged by the most in a day since Feb. 14 late Wednesday. The benchmark note was hanging around its highest yield level since Feb. 22, according to WSJ Market Data Group.

The 2-year note yield

TMUBMUSD02Y, +0.18%

 added 0.4 basis point to 2.433%, and has been hovering around its highest level since August 2008, with late-Wednesday trade also representing its largest daily yield climb in about nine weeks.

The spread between the two-year note yield and the 10-year note yield, a widely-watched measure of the yield curve, widened sharply to 48 basis points, or 0.48 percentage point, from 41 basis points on Tuesday.

Meanwhile, the 30-year bond yield

TMUBMUSD30Y, +1.38%

advanced 5.8 basis points to 3.106%, the highest since March 21, after posting its largest single-day yield climb since Feb. 21.

Bond prices move in the opposite direction of yields.

What’s driving the market

The yield curve steepened on Thursday as long-dated Treasurys came under pressure, pushing the 10-year yield and the 30-year yield up, while action in shorter-dated yields was muted. That coincided with the gradual rise in inflation expectations as commodity prices near multiyear highs. Higher prices can diminish the value of a bond’s fixed-interest payments.

See: It’s not just oil: Signs of higher inflation popping up everywhere

The 10-year break-even rate, or the bond market’s assessment for inflation over the next 10 years, rose to 2.18%. West Texas Intermediate crude

CLK8, -0.37%

neared $70, around a 3½ year high, though suffering a modest fall on Thursday’s trading.

The rise in rates for long-dated government paper helped to unwind some of the flattening of the yield curve, or the difference between short- and long-dated yields, a white-hot focus for investors.

However, Federal Reserve Gov. Randal Quarles late Wednesday said market participants, who fear that a flattening yield curve is an ominous signal about the long-term prospects for the economy or that it might portend a recession, are overplaying it.

Quarles argued that the yield curve is flattening because the Fed is hiking rates back to a natural rate after a period of ultraloose monetary policy, with the 2-year note yield, the most sensitive to such moves, rising the most and the benchmark 10-year rising at less brisk pace due to a number of other factors.

Because short-term yields have risen above long-term yields, or inverted, before each of the last seven recessions, the shape of the curve, which has yet to invert, will remain in focus.

Other Fed officials, notably San Francisco President John Williams, who is expected to become head of the New York Federal Reserve in June, suggested during a Tuesday speech in Madrid that an inversion is a real possibility. St. Louis Fed President James Bullard also has deemed an inversion a potential sign of the economic growth outlook and sees it happening soon.

See: Inflation expectations reach the highest in more than three years

What are market participants saying

“If you look at standard yield curve changes, whenever the Fed is in a rate raising mode, the yield curve tends to flatten. But I think we should why in the world after the fiscal package that was put together, putting another trillion dollars of Treasurys in the marketplace, why the curve was flattening anyway,” said Doug Peebles, chief investment officer of AB Fixed Income.

“There has been a heavy flattening move in the last couple of weeks. It’s got a bit too aggressive. If we are reversing that trade, it’s going to be the long-end that is going to underperform to take that trade off,” said Marvin Loh, senior fixed-income strategist at BNY Mellon.

Which speakers and data are ahead?
  • Fed Gov. Lael Brainard said she saw “some signs of financial imbalances in the economy.”
  • Weekly jobless claims came in at 232,000 for the week ending April 14, with economists expecting 230,000 claims
  • An April reading of business conditions from the Philadelphia Federal Reserve rose to 23.2 from 22.3.
  • Cleveland Fed President Loretta Mester is scheduled to give a speech on the economic outlook and policy at the University of Pittsburgh’s business school at 6:45 p.m.
  • Japan’s consumer-price index for March is due out at 7:30 p.m.
What other assets are in focus?

The 10-year German government bond yield

TMBMKDE-10Y, +12.88%

 climbed 6.5 basis points to 0.597%, according to Tradeweb data. German sovereign paper is seen a proxy for the eurozone’s economy and the viability of the economic bloc.

Source : MTV