Ten- and 30-year Treasury yields rose to their highest levels since 2018 and 2019, respectively, on Thursday after U.S. inflation data reinforced the likelihood that the Federal Reserve will deliver a larger-than-normal, half percentage point interest rate hike in May.
Both maturities also notched weekly gains for the second straight week. Bond markets closed early on Thursday in advance of the Good Friday holiday.
What are yields doing?
- The yield on the 10-year Treasury note TMUBMUSD10Y, 2.689% climbed 12 basis points to 2.808% from 2.688% at 3 p.m. Eastern on Wednesday. That’s the highest level since Dec. 18, 2018, based on 3 p.m. levels, according to Dow Jones Market Data. For the week, it was higher by 9.5 basis points.
- The yield on the 30-year Treasury bond BX:TMUBMUSD30Y rose 12.1 basis points to 2.917% from 2.795% late Wednesday, after factoring in reopening levels. That’s the highest level since May 3, 2019. The yield rose 17.2 basis points for the week.
- The 2-year Treasury yield TMUBMUSD02Y, 2.348% advanced 10.2 basis points to 2.442% from 2.34% on Wednesday afternoon. For the week, though, it dropped 7.6 basis points — the largest one-week decline since the period that ended March 4.
Market drivers
In an interview with Bloomberg Television, New York Federal Reserve President John Williams said on Thursday that a half-point hike in May is a “reasonable option” for U.S. central bankers. He also said the Fed needs to raise its benchmark interest rate “expeditiously” to get inflation under control.
Earlier this week, government data showed that inflation continued to accelerate in March, with the consumer price index showing its fastest annual rise since 1981. A slower rise in the monthly core rate of inflation — excluding food and energy — has prompted some investors and economists to conclude inflation may have peaked.
Data released on Thursday showed that U.S. retail sales rose a mild 0.5% in March, but high gasoline prices and inflation are taking a toll on U.S. households. Initial jobless benefit claims rose 18,000 to 185,000 for the week ended April 9. And the University of Michigan’s gauge of consumer sentiment rebounded in April to 65.7 from March’s reading of 59.4, with Americans anticipating gasoline prices will remain steady over the next year.
Meanwhile, former U.S. Treasury Secretary Larry Summers told Bloomberg Economics that a recession is “the most likely thing” for the country, partly because the Federal Reserve “is going to have to keep going until we see disinflation.”
Elsewhere, the European Central Bank affirmed expectations that it will end net asset buys under its Asset Purchase Program in the third quarter, and said any change in interest rates would come “some time after” it ends purchases. For the current quarter, the ECB said it was sticking to a plan to buy €40 billion in April, €30 billion in May and €20 billion in June, while the pace of any purchases in the third quarter would be “data dependent.”
What analysts say
“An analysis of the behavior of the yield of 10-year U.S. Treasurys during the eight major Fed tightening cycles since the 1970s suggests to us that the current selloff in long-dated U.S. government bonds may have further to run if the Fed hikes rates by a further 300bp over the coming year, as we expect,” said Franziska Palmas, a markets economist at Capital Economics. “This underpins our forecast for the 10-year Treasury yield to rise to a peak of 3.75% by the middle of 2023,” Palmas wrote in a note.
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