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Bond Report: Treasury yields slip as Russia’s seizure of nuclear power plant raises concerns

Yields for U.S. government debt were slipping Friday morning as the war in Ukraine deteriorated further, with Moscow seizing a nuclear power plant in the southern part of the Eastern European country, raising jitters that the invasion has taken a darker turn.

Meanwhile, investors are watching for the February U.S. employment report.

What are yields doing?

The 10-year Treasury note
TMUBMUSD10Y,
1.788%

yields 1.782%, compared with 1.843% at 3 p.m. Eastern Time on Thursday.

The 2-year Treasury note rate
TMUBMUSD02Y,
1.499%

stands at 1.492%, down versus 1.534% a day ago.

The 30-year Treasury bond
TMUBMUSD30Y,
2.182%

yield was at 2.176%, compared with 2.225% on Friday afternoon.

For the week, the 10-year is down 20.2 basis points from 1.984% on Friday, the 2-year was down 9.2 basis points from 1.584%; the 30-year bond yield fell 11.8 basis points from 2.294% last Friday.

What’s driving the market?

Escalation of conflict in Eastern Europe is drawing bidders for government debt, driving down yields.

As Russia lays siege to the country, it has damaged a Ukrainian nuclear-power plant, after shelling overnight which started a fire at the plant.

Investors also are watching for the February U.S. employment report on Friday, with economists polled by the Wall Street Journal predicting that the U.S. added 440,000 new jobs in February. That would be similar to a 467,000 increase in January. The official jobless rate is seen slipping to 3.9% from 4%, matching a pandemic low.

Hourly wages, meanwhile, are forecast to climb a sharp 0.5% in February. Such an increase would push the rise in pay over the past year to 5.8%, one of the biggest increases in decades.

Federal Reserve Chairman Jerome Powell already has offered unusual specificity in revealing in congressional testimony this week his intention to advocate for a 25 basis-point increase to Fed funds futures when policy makers convene in about two weeks. The coming interest-rate increase is expected to be the first in a series of hikes and the jobs report could factor into the pace of such moves, even as the Fed weighs the global impact of Russia-Ukraine clashes and the effect of sanctions levied against Moscow on commodity prices.

Those factors also have investors attuned to the compression between the 2-year Treasury yield and the 10-year, which is regarded as one widely regarded measure of the yield curve.

The yield curve is the difference between the yields on longer-term and shorter-term Treasurys and an inversion of the curve, where shorter maturities yield more than their longer-dated counterparts has historically been viewed as an indicator of possible recession.

The span between the 2-year and 10-year note yields stands at fewer than 30 basis points.

What strategists are saying

“Treasuries rallied overnight as the invasion of Ukraine continues and reports of a fire at a nuclear power plant resulting from Russian shelling make the rounds. While the situation has reportedly been contained, the episode served as a reminder of the perils of Putin’s agenda,” wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery, in a Friday research report.

In regards to the yield curve BMO’s strategists said “a drop below zero for the benchmark 2s/10s curve would undoubtedly be accompanied by concerns the event is signaling a nearing recession—a fact that would further complicate the Fed’s calculus and communications strategy.”

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