Treasury yields rose across the board on Wednesday, and the closely watched narrowing of the premium between short-dated and longer-dated bonds took a breather.
How are Treasurys performing?
The 2-year note yield the most sensitive to shifts in interest-rate expectations, rose 4.4 basis points to 2.429%, the highest since Aug. 2008, marking the largest one-day yield climb since Feb. 14. The benchmark 10-year Treasury note yield picked up 5.3 basis points to 2.867%, the largest one-day yield gain since Feb. 14.
The spread between the two-year note yield and the 10-year note yield, a widely-watched measure of the yield curve, widened slightly to 43.8 percentage points.
Meanwhile, the 30-year bond yield advanced 4.9 basis points to 3.025%, snapping a three-session yield decline, to mark its largest one-day yield climb since Feb. 21.
Bond prices move in the opposite direction of yields.
What’s driving markets?
So far, the yield curve has been flattening over concerns that a boost to fiscal policy through tax cuts and an increase to spending as the U.S. economy nears the ninth year of its expansion. But the speed at which this flattening has taken pace has taken traders aback, with some deciding to sell their holdings to cash in on the run-up in long-dated bond prices.
The curve is often tracked as a measure of investor sentiment about the economy’s overall health. In a normal environment, the yield curve steepens because investors tend to demand a higher yield for lending further into the future, while a flattening curve is read as a sign investors are worried about the longer term outlook. An inverted curve, where a shorter-dated yield exceeds the yield on longer-dated debt, rings recession alarm bells.
Since 1960, the yield curve has inverted nine times and recession has followed on seven of those occasions, according to Citigroup research. Deutsche Bank analysts have pegged the chance of a recession occurring the 12 months following a yield-curve inversion at 60%.
The rebound in long-dated yields may have also responded to recent speeches from members of the Federal Open Market Committee, the central bank’s rate-setting body, as the likes of San Francisco Fed President John Williams and St. Louis Fed President James Bullard flagged concerns over the flattening yield curve, saying a potential inversion would be an important signal of future economic growth. If the central bank pauses its monetary tightening in response to the yield curve’s shape, this could relieve downward pressure on long-dated yields.
New York Fed President William Dudley said a gradual path of interest rate increases remains appropriate, in comments made during a speech at Lehman College in the Bronx. He also suggested that the Fed could target a range of inflation between 1.5% and 2.5%, rather than the current 2% target.
Looking further ahead, market participants also are awaiting an April 26 policy gathering by the European Central Bank, which may detail its efforts to taper its quantitative-easing program, a move that could have implications for Treasurys because ultralow yields in the eurozone have helped to underpin buying of U.S. debt, which offers relatively richer returns.
What are strategists saying?
“There seems to be resistance on the long-bond around the 3.00% level. The yield curve’s had a big move, we’ve flattened almost 10 basis points since the long bond auction on the spread between the 5-year yield and the 30-year yield. Anytime you get a move of that size, you get some pushback,” said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities. The 30-year bond auction took place on last Thursday.
“Whatever gradual means for the Federal Reserve, it is does not mean back-to-back hikes yet. In this cycle that began at the end of 2015, the Fed has only hiked rates at meetings with pre-scheduled press conferences. While Powell may change this at some point, that point is not his second meeting,” wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman in a Wednesday research note.
Which other assets are in focus?
The 10-year German government bond yield rose 2 basis points to 0.530%, according to Tradeweb data. German sovereign paper is seen a proxy for the eurozone’s economy and the viability of the economic bloc.