Bond Report: 2-year Treasury yield hits 19-month high, as oil rally buttresses inflation concerns

Treasury yields traded mixed Monday, with the 2-year note hitting a 19-month high and the long bond’s rate edging back, as a rally in oil buttressed concerns about inflation in the short-term and investors positioned for an eventual reduction of the Federal Reserve’s asset purchases.

Read: Stronger-than-expected U.S. inflation data has bond traders weighing the risk of a Fed policy error

What did yields do?

The 10-year Treasury note yields

rose to 1.583%, up from 1.574% at 3 p.m. Eastern Time on Friday. At the intraday peak the yield was approaching around the highest since June, FactSet data show.

The 2-year Treasury note rate

was at 0.419%, versus 0.399% at the end of last week. That was the highest finish for the 2-year note yield, based on 3 p.m. levels, since March 18, 2020, according to Dow Jones Market Data.

The 30-year Treasury
known as the long bond, was yielding 2.015%, marking its lowest level since Sept. 27, compared with 2.048% on Friday.

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What drove the market?

Treasury yields rose mostly around the so-called belly of the yield curve, an area of bond maturities ranging from shorter to intermediate-term durations at around seven years. The 10-year yield hit its highest level since June before pulling back, posting its highest finish since Oct. 8, according to Dow Jones Market Data.

The fitful moves come as anticipation of the reduction of monthly asset purchases by the Fed builds. However, investors remain cautious about the global economy amid a backdrop of intensifying pricing pressures and concerns about the health of China’s economy, the world’s second-largest.

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Yields saw more pronounced moves earlier in the session, as Bank of England Gov. Andrew Bailey said over the weekend that the central bank would “have to act” to curb price pressures. Yields in Europe broadly have been on the ascent, with the 10-year U.K. bond

yielding 1.142%, versus 1.092% on Friday, according to FactSet data.

Germany’s 10-year government debt

was yielding minus 0.144%, versus minus 0.170% at the end of last week.

Inflation has been rising due to the supply-chain bottlenecks and a surge in demand as global economies attempt to snap back from a slowdown prompted by COVID-19. Those factors also have featured in the surge in energy prices. A rise in crude-oil prices

also has underscored the fear of rising prices around the globe.

Read: Why soaring oil prices could soon make the stock market sputter

Evidence of elevated pricing pressures, however, is bad for Treasurys, and other fixed income, because it can chip away at a bond’s fixed value, which, in turn, tends to compel investors to sell debt, driving yields higher and prices lower.

Meanwhile, an economic report on China’s gross domestic product showed that the country’s economy grew 4.9% in the third quarter from a year prior, marking a slowdown from the second quarter’s 7.9% rate.

In economic data, industrial production declined a sharp 1.3% for September, compared with the median forecast of a 0.2% gain expected from forecasters surveyed by The Wall Street Journal. The National Association of Home Builders housing market index for October came in at 80, above the median forecast of 76.

What did analysts say?

“The U.S. could be in trouble if the Fed falls behind the inflation curve although, as we’ve often seen in the past, a U.S. problem can quickly become everyone’s problem,” wrote Steve Barrow, head of G-10 strategy Standard Bank, in a Monday note.

“Environments such as these tend to see an increase in the relevance of the technicals; particularly in the absence of any obvious fundamental inputs — i.e. no data or major Fed events on the immediate horizon,” wrote Ian Lyngen and Ben Jeffery, rates strategist at BMO Capital Markets, in a Monday note.

“Alas, this is by no means a typical trading backdrop for the U.S. rates market — as evidenced by the daily volumes at 2.5x the norm. It was anything but a slow October Monday,” they wrote.

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