Bond Report: Investors seeking cover from inflation send 10- and 30-year bond yields lower for third straight session

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Nervous investors seeking shelter from higher U.S. inflation flocked to 20- and 30-year Treasury bonds on Friday, sending those yields down by more than 10 basis points each, as U.S. financial markets head into a three-day holiday weekend.

The spread between 2- and 10-year yields shrank back toward the brink of inversion and hovered around 6 basis points in a worrisome sign about the outlook. The 5s30s spread remained inverted, at minus 8 basis points.

What yields are doing

The 2-year Treasury yield
TMUBMUSD02Y,
3.133%

was at 3.138% versus 3.158% late Thursday.

The 10-year Treasury yield
TMUBMUSD10Y,
3.213%

fell to 3.207% from 3.303% on Thursday.

The 30-year Treasury yield
TMUBMUSD30Y,
3.269%

dropped to 3.248% from 3.359% on Thursday afternoon.

What’s driving markets

Treasury yields continued to drop across the board on Friday, as investors flocked to the safety of government debt. Demand was greatest for the 20- and 30-year bonds, which saw their yields drop 12 and 11 basis points, respectively, to 3.5% and 3.248% in afternoon trading. Long-term bonds are generally regarded as being better protected from inflation than government debt in the shorter and intermediate parts of the Treasury curve.

Appearing at a Federal Reserve conference on Friday, two days after policy makers delivered their biggest rate hike in 28 years, Chairman Jerome Powell underscored the central bank’s effort to cool down runaway inflation. “My colleagues and I are acutely focused on returning inflation to our 2% objective,” he said in opening remarks.
 
The Federal Reserve’s decision to hike its benchmark interest rate target by 75 basis points on Wednesday had sparked an immediate relief rally in stocks, which traded higher after Powell dashed some expectations for an even more aggressive move next month. But by Thursday, investors focused on fears of a U.S. recession, leading to a brutal equities selloff and flight to safety in government bonds. As of Friday afternoon, Dow industrials and S&P 500 were headed lower after losing gains from the open.

The Fed’s lone dissenter, Kansas City Federal Reserve President Esther George, said she voted against Wednesday’s 75-basis-point hike because  she was worried it would add to confusion over the central bank’s policy. Meanwhile, Minneapolis Federal Reserve President Neel Kashkari said on Friday that he could support another 75 basis point interest rate hike by the Fed in July.

Data released on Friday showed that U.S. industrial output rose for the fifth straight month in May, by 0.2%, after a revised 1.4% gain in the prior month. Capacity utilization inched up to 79% in May from 78.9% in the prior month. 

U.S. stock and bond markets will be closed on Monday, June 20, in observance of the Juneteenth holiday, which commemorates the end of slavery in America.

Read: Is the U.S. stock market closed on Juneteenth? What investors need to know.

What analysts are saying

“It’s been a very long week. The S&P 500 has officially entered a bear market along with concerns the Fed is accelerating the end of the recovery via its endeavors to contain inflation expectations,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.

“The one aspect of this week’s price action that the FOMC is certain to be satisfied with is the collapse of breakevens,” they wrote in a note. Meanwhile, “there is nothing on the immediate macro horizon that will offset the tone set by central bankers, as the most relevant issue has quickly become one of price discovery.”

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