Bond Report: 10-year Treasury yield rises, back above 1.6% to kick off week, as oil rally buttresses inflation concerns

The 10-year Treasury yield rose above 1.6% on Monday morning to its highest level since June, while the 2-year note rate added to highs not seen since March of 2020, as a rally in oil buttressed concerns about inflation and investors positioned for an eventual reduction of the Federal Reserve’s asset purchases.

Oil futures kicked off the week with solid gains Monday, pushing Brent crude

above $85 a barrel. Further signs of percolating inflation — with the break-even rate on five-year Treasury inflation-protected securities, or TIPS, trading at the highest level since 2005 as of Friday — also helped fuel selling in government debt, driving yields higher and prices lower. TIPs are a market-based measure of inflation expectations.

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

What yields are doing
  • The 10-year Treasury note yields

    1.617%, compared with 1.574% at 3 p.m. Eastern Time on Friday. The current level is approaching around its highest since June, FactSet data show.
  • The 2-year Treasury note rate

    was at 0.431%, versus 0.399% at the end of last week. Yields were adding to the highest level since March of 2020.
  • The 30-year Treasury
    known as the long bond, was yielding 2.049%, compared with 2.048% on Friday.

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What’s driving the market?

U.S. government debt yields resumed a fitful rise as anticipation of the reduction of monthly 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 the world’s second-largest economy.

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The rise in U.S. yields comes 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.

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, below 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.

Among Fed speakers, Minneapolis Fed President Neel Kashkari is scheduled to discuss how to improve financial inclusion at an event hosted by the Kansas City Fed at 2:15 p.m.

What analysts are saying

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

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