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Bond Report: Treasury yields rebound, sending 2-year above 4.2%, as inflation concerns resurface


Bond yields rose on Thursday as the impact of Bank of England intervention faded and data from Germany pointed to sustained central bank rate rises to tackle inflation.

What’s happening

The yield on the 2-year Treasury

gained 8 basis points to 4.221%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

climbed 11 basis points to 3.846%.

The yield on the 30-year Treasury

added 7 basis points to 3.773%.

What’s driving markets

U.S. bond yields moved higher again as the broad rally sparked by the Bank of England’s intervention to support the gilt market fades somewhat.

Benchmark 10-year Treasury yields had touched 4% on Wednesday, their highest since 2008, amid continued fretting about central banks hiking interest rates to damp inflation that is running near its fastest pace in 40 years.

However, news that the BoE had stepped in to stop frenzied selling of UK. government bonds triggered a lurch lower across the U.S. fixed income spectrum.

“Hopes of less-aggressive tightening from the Fed or a pivot in response to market volatility are likely driving the move,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

Jim Reid, macro strategist at Deutsche Bank, noted that the 10-year Treasuries’ 21 basis point retreat in the wake of the BoE action was “their biggest move lower since the wild intraday swings we had in March 2020 when the Fed was stepping in to buy Treasuries and MBS in unlimited size; sound familiar?”

“Those gains came as investors moved to downgrade the likelihood that the Fed would be pursuing aggressive policy into next year,” he added.

Thursday saw calmer activity, but with the recent underlying trend — rising bond yields — re-established after data from Germany showed inflation in the country’s most populous state running above 10%.

German 10-year bund yields

rose 13.6 basis points to 2,252%. Equivalent duration U.K. gilts

added 20 basis points to 4.210% as worries about the extra issuance required to fund the government’s inflationary budget refused to dissipate.

“Many investors want to see the Government do a U-turn on a plan to cut taxes and increase borrowing, hoping that would help stabilise markets and be the better option for the country. Yet there is no sign of that happening,” said Russ Mould, investment director at AJ Bell.

U.S. economic updates set for release on Thursday include the weekly initial jobless claims and second quarter GDP data, both due at 8:30 a.m. Eastern. St. Louis Fed President James Bullard is due to speak at 9:30 a.m. and San Francisco Fed President Mary Daly will make some comments at 4:45 pm.

Markets are pricing in a 61% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4.00% after its meeting on November 2nd. The central bank is expected to take its Fed funds rate target to 4.5% by April 2023, according to the CME FedWatch tool.

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