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Investors Seeking Inflation Hedge Push 10- and 30-Year Bond Yields Down for Third Consecutive Session

Nervous investors flocked to 10-, 20- and 30-year Treasuries on Friday, sending their yields falling more than the rest of the curve, as U.S. financial markets headed into a three-day holiday weekend. .

Despite three consecutive sessions of decline, 10- and 30-year yields remained up for the week. Meanwhile, the spread between 2- and 10-year yields narrowed towards the edge of reversal and hovered below 6 basis points, a worrying sign for the outlook. The 5s30 spread remained inverted at minus 5.6 basis points.

What Do Yields Do
  • The 10-year Treasury yield TMUBMUSD10Y,
    3.236%
    fell 6.5 basis points to 3.238% from 3.303% on Thursday. This is the lowest level since June 10. For the week, the rate still increased by 8.2 basis points.

  • The 30-year Treasury yield TMUBMUSD30Y,
    3.282%
    fell 6.6 basis points to 3.293% from 3.359% on Thursday afternoon. For the week, it was still up 9.8 basis points.

  • The 2-year Treasury yield BX:TMUBMUSD02Y rose less than 1 basis point to 3.164% from 3.158% on Thursday evening. For the week, the yield rose 11.7 basis points.

What drives the markets?

Most Treasury yields continued to fall on Friday as investors flocked to government debt safety, with the greatest demand seen for 10-, 20- and 30-year bonds. Long-term bonds are generally considered to be better protected against inflation than government debt in the short and middle parts of the Treasury curve.

Financial markets continued to weigh the ramifications of the Federal Reserve’s decision to raise its benchmark interest rate target by 75 basis points on Wednesday, its biggest hike in 28 years. While investors initially made the decision without hesitation, they have since grown increasingly wary, given what many see as the prospect of a recession in the United States, if the Fed proceeds with further rate hikes. Major U.S. stock indices ended Friday on a mixed note, after swinging between losses and modest gains, while parts of the Treasury curve flattened or remained inverted.

At a conference on Friday, Fed Chairman Jerome Powell highlighted the central bank’s efforts to calm runaway inflation. “My colleagues and I are very focused on getting inflation back to our 2% target,” he said.

Meanwhile, the Fed’s only dissenter, Kansas City Federal Reserve Chair Esther George, said she voted against Wednesday’s 75 basis point hike because she feared it would adds to the confusion over central bank policy. His colleague, Minneapolis Federal Reserve Chairman Neel Kashkari, said Friday he could support another 75 basis point interest rate hike in July.

Data released on Friday showed U.S. industrial production rose for the fifth straight month in May, rising 0.2%, after a revised gain of 1.4% the previous month. Capacity utilization increased slightly to 79% in May from 78.9% the previous month.

US stock and bond markets will be closed on Monday, June 20, the June 19 holiday, which commemorates the end of slavery in America.

Lily: Is the US stock market closed on June 16? What investors need to know.

What analysts say

“It’s been a very long week,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.

“The one aspect of this week’s price action that the FOMC is certain to be pleased with is the collapse of break-evens,” they wrote in a note released early Friday. Meanwhile, “there is nothing on the immediate macroeconomic horizon that will offset the tone set by central bankers, as the more relevant question has quickly become that of price discovery.”

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Post expires at 11:02pm on Tuesday June 28th, 2022