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

US 10-year Treasury bond yields surged over 1.6% Monday morning to their highest level since June, while 2-year Treasury bond rates rose to highs not seen since March 2020 as an oil rally raised concerns inflation and investor positioning underpinned an eventual reduction in the Federal Reserve’s asset purchases.

Oil futures started the week with solid gains on Monday, pushing Brent crude BRN00 + 0.33% above $ 85 a barrel. Other signs of pervasive inflation – with the break-even rate for five-year inflation-linked Treasury securities, or TIPS, which traded on Friday at its highest level since 2005 – also helped boost government bond sales, making yields higher and higher lowered prices. TIPs are a market-based measure of inflation expectations.

Read: Stronger-than-expected US inflation data makes bond traders weigh the risk of a monetary policy error by the Fed

What returns do
  • The 10-year government bond is yielding TMUBMUSD10Y, 1.585% 1.617%, compared to 1.574% at 3:00 p.m. Eastern time on Friday. The current level is approaching its highest level since June, according to FactSet data.

  • The 2-year government bond rate TMUBMUSD02Y, 0.419%, was 0.431% down from 0.399% at the end of last week. Yields rose to their highest level since March 2020.

  • The 30 Year Old Treasury TMUBMUSD30Y, 2.024%,
    known as the long bond, it returned 2.049% compared to 2.048% on Friday.

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What is driving the market?

US Treasury bond yields skyrocketed again as the Fed is expected to reduce monthly purchases. However, given mounting price pressures and concerns about the health of the world’s second largest economy, investors remain cautious about the global economy.

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The surge in US yields comes as Bank of England Governor Andrew Bailey said over the weekend that the central bank “must act” to contain price pressures. Yields in Europe are broadly on the rise, with UK 10-year TMBMKGB-10Y yielding 1.124% yielding 1.142%, up from 1.092% on Friday, according to FactSet data.

Germany’s 10-year government bond TMBMKDE-10Y, -0.156%, returned minus 0.144%, compared to minus 0.170% at the end of last week.

Inflation has risen due to supply chain bottlenecks and a surge in demand as global economies seek to recover from a slowdown caused by COVID-19. These factors have also contributed to the rise in energy prices.

However, indications of increased price pressures are bad for treasuries and other fixed income securities, as they can reduce the fixed value of a bond, which in turn forces investors to sell bonds, resulting in higher yields and lower prices.

Meanwhile, an economic report on China’s gross domestic product showed that the country’s economy grew 4.9% year over year in the third quarter, a slowdown from the 7.9% level seen in the second quarter.

In economic data, industrial production fell 1.3% in September, below the median forecast of 0.2% expected by forecasters interviewed by the Wall Street Journal. The National Association of Home Builders’ housing market index for October came in at 80, above the average forecast of 76.

Among the Fed speakers, Minneapolis Fed President Neel Kashkari will discuss how to improve financial inclusion at an event hosted by the Kansas City Fed at 2:15 pm

What analysts are saying

“The US could get into trouble if the Fed falls behind the inflation curve, although, as we have seen many times in the past, a US problem can quickly become a problem for everyone,” wrote Steve Barrow, head of G-10 strategy Standard Bank, in a research note posted on Monday.

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