Bond Report: 2-year Treasury hits highest yield in over 2 years as commodity prices surge, reigniting inflation jitters

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Yields for U.S. government debt rose briskly Tuesday, pushing the 2-year maturity to a fresh 52 week high and its loftiest rate since 2019, as the recent surge in commodity prices helped to feed already-elevated concerns about inflation, while reports of possible further fiscal stimulus in Europe to fund energy and military spending resulting from the Ukraine war helped lift the stocks and the euro.

What did yields do?

The 10-year Treasury note
TMUBMUSD10Y,
1.849%

yields 1.853%, up 12.2 basis points from and marking its highest yield since Feb. 25, 2022, based on 3 p.m. ET closing levels. Yields for debt move opposite to prices.

The 2-year Treasury note rate
TMUBMUSD02Y,
1.604%

stands at 1.627%, rising 8.1 basis points from 1.546% a day ago. The 2-year note rate stands at a new 52-week high, its highest level since Dec. 26, 2019.

The spread between the 2-year and 10-year notes, known as the yield curve, stand at around 24.3 basis points. The yield curve is viewed as an accurate recession indicator.

The 30-year Treasury bond
TMUBMUSD30Y,
2.233%

rose 9.2 basis points to yield 2.241%, marking its highest yield since Feb. 25, 2022.

What drove the market?

Commodity prices have surged and that has driven up expectations for inflation, which can chip away at the fixed value of debt, including its regular coupon payments.

Fears about the intensifying crisis in Ukraine have supported some safe-haven purchases for bonds versus stocks but rising prices in everything from crude oil
CL.1,
+4.42%

to dry goods and services have served to weigh on the appetite for Treasurys, even as worries about the health of the global economy rises.

On Tuesday, President Joe Biden announced a U.S. ban on Russian oil imports, ratcheting up pressure on Moscow as the war in Eastern Europe continues to worry investors.

A report on U.S. consumer prices on Thursday will provide fresh evidence of inflation, which could ripple through markets.

Meanwhile Bloomberg reported the European Union will announce a plan this week to jointly issue bonds to finance energy and military spending. The region’s leaders meet on Thursday for a two-day summit which is expected to examine the proposal. The spread between German and Italian debt tightened following the news. The euro
EURUSD,
+0.48%

extended gains and stocks in the region pared earlier losses. 

Separately, an auction of 3-year U.S. Treasury notes
TMUBMUSD03Y,
1.744%

was relatively weak, tailing 1.2 basis points. The so-called tail represents the difference between the highest accepted yield and the yield seen ahead of the sale.

“This is the widest tail since March 2020 (2.9 bps) and you’d have to go back to February 2010 to find another one that was (1.5 bps),” wrote Jefferies economists in a note.

In economic reports, the U.S. trade deficit climbed 9.4% in January to a record $89.7 billion as the U.S. bought more foreign oil, autos and other goods.

What strategists say

“Inflation is running wild. The answer to higher prices is higher prices. It certainly feels that way. And the likelihood of a soft landing seems less and less likely,” writes Greg Faranello, head of U.S. rates at AmeriVet Securities in New York.

“If the overnight sell-off in government bonds holds through the morning, the 3-yr UST auction enjoys clear sailing,” wrote Jim Vogel, executive vice president at FHN Financial, in a Tuesday note.

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