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Bond Report: Treasury yields post their biggest rises in almost a week as investors reassess economic growth prospects

Two-, 10- and 30-year Treasury yields posted their biggest rises in almost a week on Wednesday, as investors reconsidered the outlook for global economic growth and U.S. stocks tried to cling to modest gains.

What are yields doing?

The yield on the 10-year Treasury note

rose 4.4 basis points to 2.817% from 2.773% at 3 p.m. Eastern on Tuesday.

The 2-year Treasury note yield

rose 3.3 basis points to 2.577% from 2.544% Tuesday afternoon, based on new issue levels.

The yield on the 30-year Treasury bond

rose 3.8 basis points to 2.907% from 2.869% late Tuesday.

What’s driving the market?

Yields have surged this year as investors penciled in increasingly aggressive expectations for the Federal Reserve to rapidly raise interest rates and to scale back the size of its balance sheet as it deals with inflation running at its hottest in four decades.

Until Wednesday, Treasury prices had found support in part from a flight to safety on volatile swings in global equity markets and worries about lockdowns in China to contain COVID. China’s zero-COVID policy has been seen as posing a renewed threat to supply chains, which could stoke inflation pressures, while the country’s economy is also showing signs of a significant slowdown.

Developments around the Russia-Ukraine war also remain in focus. State-controlled Russian giant Gazprom
said it had cut natural gas deliveries to Poland and Bulgaria for refusing to pay in Russian rubles, as demanded by President Vladimir Putin.

Read:‘Energy is being increasingly weaponized.’ Analysts weigh up risks after Russia cuts gas to two EU countries

The dollar, meanwhile, continues to rise, gaining ground against the euro EURUSD and the British pound GBPUSD.

Data released on Wednesday showed the U.S. trade deficit in goods soared almost 18% in March to a record $125.3 billion, reflecting America’s huge demand for imported goods and rising prices tied to high inflation. Meanwhile, pending home sales fell 1.2% in March.

Treasury’s $49 billion sale of 5-year notes BX:TMUBMUSD05Y on Wednesday produced “decent” results and “average” statistics, according to Jefferies economists Thomas Simons and Aneta Markowska.

What are analysts saying?

While Treasurys and other haven assets have room for periods of support, those episodes are likely to prove temporary, said Steven Barrow, head of G-10 strategy at Standard Bank, in a note.

“In our view, the path of least resistance in this case is for yields to move higher given factors such as surging inflation and central bank tightening. Hence, the best that government bond investors can hope for right now is that bond prices generally move sideways, albeit presumably with quite a bit of day-to-day volatility as risk sentiment ebbs and flows,” he wrote.

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