Short-dated Treasury yields rose while long-dated yields were mostly flat on Friday, extending the flattening trend seen this week, as investors braced for higher interest rates from the Federal Reserve after an inflation report and minutes from the central bank’s last policy meeting.
What are yields doing?
The yield on the benchmark 10-year U.S. Treasury note was mostly unchanged at 2.828%, but was up around five basis points this week, the largest weekly rise since Feb. 2.
The 2-year note yield sensitive to shifting expectations for monetary policy, was up 2.1 basis points to 2.368%, this contributed to a weekly climb of 9.4 basis points, the largest since Feb. 16.
The 30-year Treasury bond yield was down 0.6 basis point to 3.033%, trimming the weekly rise to 1.2 basis points.
The spread between the 2-year note yield and the 10-year note yield, a widely-watched measure of the yield curve, narrowed to 46 basis points, the tightest since September 2007. A flattening yield curve is often a feature of a rising rate environment. A flattening curve can spur worries about an economic slowdown.
Yields and debt prices move in opposite directions.
What’s driving the market?
Long-dated Treasury yields were up slightly for the week after geopolitical worries faded somewhat, sapping haven-related demand as investors piled back into stocks and other assets perceived as risky. Investors tend to flock to the long-end of the bond market instead of the front-end during so-called flights to safety. Stocks ended higher this week, with the S&P 500 and Nasdaq Composite up by at least 2%.
Short-dated yields rose more rapidly after the minutes from the Fed’s recent policy meeting showed senior central bankers were open to raising interest rates until tighter monetary policy started to slow growth. The March consumer-price index report released Wednesday showed inflation above the Fed’s 2% target. But the Fed’s preferred inflation gauge, based on personal-consumption expenditures, remains below 2%.
Meanwhile, the concern that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping investors on edge. An inverted yield curve has often preceded a recession.
Riskier assets were buoyed after President Donald Trump appeared to walk back the threat of an imminent military strike on Syria in response to an alleged chemical attack on the rebel-held town of Douma by Syrian President Bashar al-Asad’s forces. The potential for action, however, remains a factor for markets.
The Trump administration is also planning to ratchet up pressure on China by focusing on new tariffs and threatening to block Chinese investment strategy in the U.S.
What are analysts saying?
“The March FOMC minutes were hawkish for us, conveying the committee’s optimism on growth and inflation, with downside risks from retaliatory trade actions, while keeping the prospect of fourth hike this year alive,” said fixed-income analysts at Société Générale.
“Most Treasury market rates ended the week higher and the slope of the yield curve bowed as the threat of military action replaced the threat of tariff wars as a market driving force,” said Ward McCarthy, chief financial economist for Jefferies.
What economic data is on tap?
Boston Fed President Eric Rosengren on Friday told the Boston Chamber of Commerce that the central bank might have to tighten monetary policy more aggressively than reflected in the median forecast for the fed-funds rate. The Fed has forecast three rate rises this year and three more in 2019.
St. Louis Fed President James Bullard pushed back on the Fed minutes on Friday. He said not all members of the Federal Open Market Committee, its policy-making body, were in favor of higher interest rates, adding that he did not think further rate increases were needed.
The latest consumer sentiment reading for April fell to a three-month low of 97.8 from 101.4 in April. Economists polled by MarketWatch were expecting a reading of 101.0
What are other markets doing?
The 10-year German government bond yield was flat at 0.511%.