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Bond Report: 2- and 10-year Treasury yields see biggest weekly rise since 2019 ahead of Fed meeting

Yields on short-dated Treasurys rose for a fifth straight session Friday ahead of what is expected to be the first increase of benchmark interest rates by the Federal Reserve at its policy meeting next week.

Investors also continued to watch fast-moving developments in Ukraine, with Russian President Vladimir Putin implying there were signs of progress in talks with Kyiv, even as Russia widens the war with bombing in western Ukraine.

What are yields doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.995%

stood at 2.004% at 3 p.m. Eastern, down slightly from 2.008% at the same time Thursday. The 10-year yield rose 28.2 basis points for the week, its largest such rise since the week ended Sept. 13, 2019 based on 3 p.m. levels, according to Dow Jones Market Data.

The 2-year Treasury note rate
TMUBMUSD02Y,
1.756%

rose to 1.748%, compared with 1.717% a day earlier. The yield jumped 25.8 basis points over the week, also the largest since Sept. 13, 2019.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.355%

fell to 2.363%, compared with 2.392%. The yield saw a weekly rise of 21.5 basis points.

The spread between the 2-year and 10-year notes, a measure of the yield curve, narrowed by nearly 4 basis points to 25.6 basis points. The spread has narrowed significantly this year, flattening the curve. An inversion of the curve, which hasn’t happened yet, is viewed as a reliable recession warning signal.

What’s driving the market?

Yields have climbed steadily this week, despite the persistence of the conflict in Europe, suggesting that worries about inflation and coming central bank interest-rate increases hold a greater sway with markets than the military clash.

The Federal Reserve’s two-day policy meeting starting next Tuesday is expected to result in a hike of Fed funds rates by 25 basis points, from the current range between 0% and 0.25%.

The University of Michigan’s consumer sentiment index fell, in an initial March reading, to 59.7 from February’s level of 62.8. Economists were expecting a reading of 62.0, according to a Wall Street Journal survey. On Thursday, consumer price data showed U.S. February consumer prices rose to 7.9%, a 40-year high, and some see that worsening due to the Russia-Ukraine war.

Consumer expectations for inflation over the next year rose to 5.4% from February’s expectation of 4.9%, the highest level since 1981, while inflation expectations over five years held steady at 3%.

In geopolitics, Russian President Vladimir Putin told his Belarusian counterpart Alexander Lukashenko that he had seen “certain positive” shifts, according to Russian news agency Interfax, and that sparked a more a positive tone in equity markets, which is weighing on so-called havens such as Treasurys and gold bullion.

Putin’s remarks come as the invasion of Ukraine by the Kremlin enters a third week, with troops tightening its circle around the capital city.

President Joe Biden announced Friday that the U.S. would end normal trade relations for Russia over its invasion.

What strategists are saying

“Given the focus on tamping down inflation, there is a fear that the Fed could move too fast and threaten growth,” said Lindsey Bell, chief markets and money strategist for Ally.

“The recent move in Treasury rates has led to a flattening of the yield curve. An inversion of the yield curve has historically been a leading indicator of recession,” she said. “GDP growth could come under pressure in the coming quarters amid high inflation and weak consumer sentiment. The conflict in Ukraine is the wild card in this scenario. De-escalation will be necessary to reduce inflationary pressures. The consumer remains on solid footing, but higher prices can quickly eat away at savings and ultimately economic growth.”

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