Treasurys on Friday fell further, pushing yields higher, and putting government paper in position to consolidate a sharp weeklong climb as investors appear to form a consensus that the Federal Reserve may be aggressive in lifting interest rates in 2018.
How are Treasurys doing?
The benchmark 10-year Treasury note yield was up 2.4 basis points to 2.938%, extending a climb that has taken the note up 10 basis points from 2.828% and the end of last week. The 2-year note yield was up 1.3 basis points to 2.449%, while the 30-year bond yield added 2.5 basis points to 3.130%.
The spread between the two-year note yield and the 10-year note yield, a widely-watched measure of the yield curve, widened to 49 basis points, or 0.49 percentage point, from 41 basis points on Tuesday.
Bond prices fall as yields rise.
What’s driving the market?
In a week full of speeches by members of the Federal Reserve’s rate-setting body, investors have gradually swung to the view that the central bank would raise rates three additional times this year. The minutes from the March Fed policy meeting highlighted the central bank’s willingness to tighten monetary policy, but before this week, a few investors were still unsure about how much of that view was shared among all the members of the FOMC.
New York Fed President William Dudley said the central bank could still pass several rate hikes before monetary policy started to become tight, while Cleveland Fed President Loretta Mester said the Fed should keep raising rates to prevent the economy from overheating.
Chicago Fed President Charles Evans will speak on economic conditions and monetary policy at 9:40 a.m. Eastern. Soon after, San Francisco Fed President John Williams will talk at 11:15 a.m.
Traders on the fed-fund futures market see a 36% chance of a total of four hikes in 2018, compared with 24.5% on April. 11.
The hawkish sentiment has contributed to the flattening of the yield curve in the past few weeks by pushing down long-dated yields and pulling up short-dated yields. But this week the curve steepened as traders engaged in some profit-taking of a trade that has proved highly lucrative since last year.
Long-dated yields have also rose on the back of strengthening inflation expectations despite a paucity of economic data in the week to feed concerns of growing price pressures. Higher crude and commodity prices have been the principal driver of the short-term jump in the 10-year break-even rate, the bond market’s assessment for inflation over the next 10 years, to 2.17%. Certain forward-looking gauges such as the Philadelphia Fed business outlook survey and the Fed’s Beige Book also show signs of higher material costs and potential wage hikes.
What are market participants saying?
“The main theme surely is the flattening curve and all that implies. Behind that has to be ongoing Fedspeak that has only enhanced prospects of three more hikes this year,” said David Ader, chief macro strategist at Informa Intelligence.
“Given the position bias for flattening, periodic steepening corrections should be expected but don’t signal a change in view, but rather a case of ringing the register after which there will attempts to justify the price action with something more cerebral until we revert to flattening.”
“The inflation the Fed so desperately sought for so long has arrived, not massive inflation, but moderate inflation nonetheless. And the forward-looking indicators suggest they are here to stay until the Fed gets further ahead of the curve,” said David Rosenberg, chief economist for Gluskin Sheff.
What are other assets doing?
The U.K. 10-year government bond yield was down 1.9 basis points, according to Tradeweb data, while the German 10-year bond yield was unchanged at 0.594%.