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Bond Report: 10-year Treasury rate slips to around 1.67% before popping back as Ukraine crisis deepens

U.S. Treasury yields on Monday were mostly higher, after dipping firmly overnight, as the conflict between Ukraine and Russia is in its 12th day and Western nations consider upping sanctions against the Kremlin.

What yields are doing

The 10-year Treasury note

yields 1.745% after hitting a Monday low at 1.675%, compared with a 1.722% on Friday at 3 p.m. Eastern Time. Yields for government debt move in the opposite direction to prices.

The 2-year Treasury note

rate stands at 1.508%, up slightly from 1.49% at the end of last week.

The spread between the 2-year and 10-year Treasury stands at below a quarter of a percentage point.

The 30-year Treasury bond

yields 2.166%, versus 2.148% on Friday afternoon.

What’s driving the market?

Western nations are considering sanctioning Russian oil imports as the Eastern European military conflict, between Kyiv and Moscow intensifies.

U.S. Secretary of State Antony Blinken said during a round of Sunday talk shows that the White House is considering a coordinated ban of Russian oil and natural gas imports, which could push oil values for energy assets higher.

Richer oil prices holds implications for U.S. and global inflation in the near term and can compound fears of surging pricing pressures for goods and services.

Although worries about the conflict in Europe has drawn so-called flight-to-safety bids among buyers aiming to benefit from the steady coupon payments of government debt in uncertain times, inflation has the power to erode a bond’s fixed value.

On top of that, the Federal Reserve has said it is eager to lift benchmark Fed funds rates, which stand at a range between 0% and 0.25%, by a quarter of a percentage point at its coming policy gathering next week.

Some fear that the combination of war abroad, already elevated inflation and rising rates could create a recession in the U.S., a notion that appears to be getting reflected in the narrowing spread, known as the yield curve, between 2-year Treasury notes and benchmark 10-year debt.

Later in the session, investors might look to glean insights from a report on consumer credit due at 3 p.m. Eastern Time.

What strategists are saying

“The yield curve flattening portends much more ominous growth assumptions,” wrote analyst at Jefferies, led by Sean Darby, global equity strategist, in a research note dated March 7.

“The playbook that the central banks had hoped for a smooth tightening of inflation
expectations has been rudely interrupted by the Russian invasion of Ukraine. Not
only have energy prices soared but so too have food prices,” Jefferies said.

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