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Bond Report: 10-year Treasury yield rises, back above 1.6% to kick off week

The 10-year Treasury yield on Monday morning was punching above the highest rate since around June, rising to around 1.6%, and the 2-year note rate added to highs not seen since March of 2020, as investors positioned for an apparent reduction of the Federal Reserve’s market-supporive asset purchases.

Further signs of percolating inflation, with the break-even rate on five-yearTreasury inflation-protected securities, or TIPS, trading at the highest level since 2005, 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
    TMUBMUSD10Y,
    1.593%

    1.619%, 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
    TMUBMUSD02Y,
    0.439%

    was at 0.444%, versus 0.399% at the end of last week. Yields were adding to the highest level since March of 2020.
  • The 30-year Treasury
    TMUBMUSD30Y,
    2.028%
    ,
    known as the long bond, was yielding 2.053%, 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 economic and 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 yields in the U.S. come 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
TMBMKGB-10Y,
1.138%

yielding 1.155%, versus 1.092% on Friday, according to FactSet data.

Germany’s 10-year government debt
TMBMKDE-10Y,
-0.149%

was yielding minus 0.136, 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.

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, a report on industrial production for September is due at 9:15 a.m. ET, which is expected to show a seventh consecutive increase for the month. The National Association of Home Builders housing market index for October is due at 10 a.m.

In Fed speakers, Fed Gov. Randal Quarles was slated to discuss financial stability at the Banco de España Conference at 5:30 a.m. ET, while Minneapolis Fed President Neel Kashkari was 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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