2-year Treasury yield edges down from nearly 16-year high

U.S. bond yields pulled back Monday, though the policy-sensitive 2-year rate remained near an almost 16-year high, as buyers returned to Treasurys.

What’s happening

The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.794%
fell 1.2 basis points to 4.791% at 3 p.m. Eastern. Friday’s level was the highest since July 19, 2007, based on 3 p.m. figures from Dow Jones Market Data. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.924%
was fell 2.7 basis points to 3.921%.
The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.937%
slipped 1.9 basis points to 3.918%.

What’s driving markets

Bond investors continued to assess signs that U.S. inflation is not coming down as quick as hoped, although buyers returned to the intermediate and longer-term parts of the Treasury market — leaving the policy-sensitive 2-year yield near its highest level since 2007 and the benchmark 10-year yield moving further away from 4%.

The PCE index, released on Friday, showed annual inflation increasing to 5.4% in January from 5.3% in December. PCE inflation had been on a mostly downward trend since hitting a 40-year high of 6.8% last June.

Stubborn inflation is reducing the chances the Federal Reserve will stop raising interest rates anytime soon, and this has been pushing up Treasury yields.

Markets are pricing in a 75.3% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. The chances of a 50 basis point hike are seen at 24.7%, up from 18% a week ago.

Read: Fed rate hike call for March lifted to 50 basis points by NatWest

The central bank is mostly expected to take its fed-funds rate target to a cycle peak of between 5.25% and 5.5%, or higher, by September, according to 30-day fed funds futures.

Data released on Monday showed that durable goods orders sank 4.5% in January because of a pullback in volatile passenger plane bookings. Yet business investment rose at the fastest pace in five months. U.S. pending home sales rose 8.1% last month.

What analysts are saying

“The start of the week in Treasuries will be spent with an eye on 4% 10s [10-year yield] and the likelihood the bearishness that has been on display over the past several weeks presses the selloff beyond that crucial line in the sand. Despite the data that has been revealed in the wake of the February FOMC [Federal Open Market Committee] all pointing toward higher rates and the market recalibrating to reflect a terminal rate beyond 5.50%, there has been enough demand to keep 10s below 4% for the time being,” said BMO Capital Markets strategists Ben Jeffery and Ian Lyngen, in a note.

“Looking ahead, one of the greatest macro uncertainties of the coming quarters will be the impact a reopened China will have on the global economy,” they wrote.

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