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Bond Report: Treasury yields rise, and 2-year carves out fresh 52-week high, as investors monitor Ukraine-Russia crisis

Treasury yields climbed across the board Wednesday as investors held out some hope that a resolution of hostilities, now in the second week, in the Ukraine could soon be achieved.

Yields for U.S. government debt were little affected by a lackluster auction of 10-year paper.

What are yields doing?

The 10-year Treasury note
TMUBMUSD10Y,
1.950%

yields 1.946%, up 7.6 basis points from 1.870% at 3 p.m. Eastern Time on Tuesday.

The 2-year Treasury note
TMUBMUSD02Y,
1.677%

rate was at 1.676%, up 4.9 basis points from 1.627% a day ago. Wednesday’s finish for the short-term note marked the highest since Nov. 7, 2019.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.326%

rose 6 basis points at 2.301%, hitting the highest level since Feb. 17.

The spread between the 2-year and 10-year notes, known as the yield curve, stands at 27 basis points. The shape of the yield curve is viewed as an indicator of possible recession.

What’s driving the market?

Investors sold bonds, driving prices down and yields higher, ahead of a central bank update from the European Central Bank on Thursday and the Federal Reserve’s likely decision to lift benchmark interest rates next week, as a surge in commodity prices, including oil and natural gas, resulting from the conflict in Ukraine is seen leading to even higher inflation in Europe and the U.S.

On Tuesday, U.S. President Joe Biden announced a U.S. ban of imports of Russian oil in response to Moscow’s invasion of Ukraine.

West Texas Intermediate crude futures, the U.S. oil benchmark, had already topped $130 a barrel on Sunday as a result of the conflict. WTI futures have since fallen back, trading at $125.24 on Wednesday morning.

In U.S. economic reports on Wednesday, job openings fell slightly in January to 11.3 million after setting a record at the end of 2021, but millions of workers continue to quit each month. The number of open positions slipped from a revised 11.5 million December, the Labor Department said Wednesday.

Meanwhile, a $34 billion reopening auction of roughly 10-year notes tailed 0.4 basis points short at 1.920%. The auction was viewed as average by analysts.

What strategists are saying

“Overall, this was a pretty vanilla auction. Considering how many record-breaking or generally surprising auctions we have had recently, this one looks very much routine,” wrote Jefferies economists Thomas Simons and Aneta Markowska, in a note.

“US rates edged higher overnight with 10-year yields reaching 1.909% as the Russian invasion of Ukraine continues,” wrote BMO Capital Markets strategist Ian Lyngen and Ben Jeffery. “In the wake of the position stop outs that have defined the recent trading conditions in Treasurys, the market is now in the process of price discovery from a balanced departure point. At its essence, the debate is whether to put more emphasis on the impact on Treasurys from higher inflation resulting from the run-up in commodities or the eventual fallout for the global economy resulting from the war in Eastern Europe and the associated sanctions and supply disruptions,” the strategists wrote.

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