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Bond Report: 10-year Treasury yield edges higher as investors assess Russia-Ukraine tensions, Fed path

Fears that a Russian invasion of Ukraine may be imminent continued to lift demand for Treasurys and other assets perceived as safe on Monday, pulling down yields that had previously soared in reaction to persistently hot inflation readings.

What are yields doing?

The yield on the 10-year Treasury note was 1.924%
TMUBMUSD10Y,
1.925%
,
compared with 1.951% at 3 p.m. Eastern on Friday. The yield on Friday fell 7.7 basis points, for the largest one-day decline since Jan. 21. It rose 2.1 basis points last week.

The 2-year Treasury yield
TMUBMUSD02Y,
1.521%

stood at 1.513%, compared with 1.514% on Friday afternoon. It climbed 19.2 basis points last week, the largest weekly gain since the period that ended Oct. 11, 2019, based on 3 p.m. levels, according to Dow Jones Market Data.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.229%

was 2.228% versus 2.254% late Friday.

What’s driving the market?

Fears of a Russian invasion of Ukraine brought a Treasury selloff to a halt on Friday as investors appeared to show interest in traditional havens or were reluctant to be short those same assets headed into the weekend. The rebound in prices, which pulled down yields, came after Jake Sullivan, the White House national security adviser, warned that a Russian invasion of its neighbor could come “any day now.”

Read: What a Russian invasion of Ukraine would mean for markets as Biden warns Putin of ‘severe costs’

A Saturday phone call between U.S. President Joe Biden and Russian President Vladimir Putin produced no breakthroughs. The White House said Biden warned Putin that a further invasion of Ukraine would see the U.S. and its allies impose “swift and severe costs” on Russia. Biden has ruled out sending combat troops to Ukraine, but has threatened sweeping sanctions aimed at the country’s financial system.

See: Inflation and armed global conflict have investors worried about Jay Powell’s trigger finger

The yield on the 10-year Treasury note pushed above 2% on Thursday for the first time since 2019 as the January consumer-price index came in at a hotter-than-expected 7.5%, a nearly 40-year high, prompting expectations the Fed would be more aggressive in hiking interest rates.

St. Louis Federal Reserve Bank President James Bullard on Thursday added fuel to the Treasury selloff, saying that he favored raising rates by 100 basis points, or 1 percentage point, by July 1, including the possibility of a half-point, or 50 basis point, rise in March. Bullard, a 2022 voting member of the Fed’s rate-setting Federal Open Market Committee, was due to be interviewed on CNBC Thursday morning.

Kansas City Fed President Esther George, in an interview with The Wall Street Journal published Monday, said she wasn’t convinced of the need for a 50-basis-point rate hike in March, while reiterating her call for the Fed to begin selling assets from its nearly $9 trillion balance sheet to help fight inflation. George is also an FOMC voting member this year.

“If we get to March and the data says we should be talking about that [a half-point rate increase], I’m sure that will be in play, but I’m not sure that is the answer, per se, to how we get there,” George said.

What are analysts saying?

“Fixed-income markets are clearly caught between the specter of policy tightening, particularly from the Fed, which looks set to lift yields, and the geopolitical tensions surrounding Ukraine, which seem set to lower yields in the short-term,” said Steve Barrow, head of G-10 strategy at Standard Bank, in a note.

“While these two opposing forces will be in play over the short term, it seems very likely that only the former — policy tightening — will persist into the long haul and hence it is this that seems likely to dictate how fixed-income markets trade over time,” he said, arguing that geopolitical concerns likely won’t be used as a reason by central banks to hold off from tightening policy.

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