(Bloomberg) — U.S. Treasury yields rose Monday, with poor demand from an auction of two-year notes sparking renewed selling that pushed key benchmarks up more than 20 basis points and rose the rate at 10 years or more since then. the March 2020 Covid crash.
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US inflation hovered near a four-decade high and a Federal Reserve now expected to raise policy rates to at least 4.6% in 2023 are driving bearish market sentiment, with tight liquidity which aggravates the movements. A renewed rise in UK gilt yields, with key benchmarks rising around 40-50 basis points, also increased pressure on the global bond market.
Both nominal and inflation-adjusted yields rose to new multi-year highs, accelerating an ever-deepening decline. The 10-year rose as much as 24 basis points to 3.93% in New York, its highest level since April 2010. Treasury options flow was active and mixed in direction with yields in prolonged peaks The benchmark US yield fell as much as six basis points to 3.86% in the Asian session on Tuesday.
“The Fed is in a situation where it needs to be stronger and the market is recovering,” said Jason Pride, director of private wealth investments at Glenmede Investment Management. “If you step back and look at the big picture, the Fed really wants higher rates.”
The front end of the Treasury curve came under pressure after two-year auction bonds sold at yields above the prevailing market rate at the time the auction closed, a sign that the ‘rise in bond yields is not enough to attract buyers. That sets a gloomy forecast for upcoming five- and seven-year note sales this week, especially as month-end and quarter-end liquidity tends to be tighter.
Monday’s settlement pushed five-year yields up more than 20 basis points to around 4.19%, while seven-year yields rose 24 basis points to 4.11%, hitting an all-time high in 1993. A Bloomberg index of liquidity conditions prevailing in the US Treasury market has risen steadily in recent weeks and is far from its peak seen in March 2020.
In a sign of further tightening in financial conditions, the 10-year inflation-protected Treasury yield rose 31 basis points to 1.62% for the first time since April 2010. The real yield at five years it rose 31 basis points to 1.91%. Rates on both tenors fell around three basis points on Tuesday.
Concerns that Fed policy would push the economy into recession were being flagged by the 30-year bond that delayed the sell-off, yielding 13 basis points at 3.74%. The spread between two-year and 30-year yields widened to negative 0.68 percentage points, the deepest reversal since 2000, before returning to flat on Monday afternoon. The spread of 2- and 10-year Treasury bonds was minus 43 basis points, about 10 points closer to positive territory.
(Update Treasury movements in paragraphs three and seven)
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