(Bloomberg) — The U.S. Treasury market is ending one of its worst weeks in a decade, with yields pushed to their highest levels in a year by worsening inflation and a looming global shift toward a restrictive monetary policy.
In the four days through Thursday, Treasuries lost 1.6%, erasing the value of their interest payments over the past year, according to data compiled by Bloomberg. An index of Treasury bonds has fallen 3.8% this year, more than it has lost in any full year recorded in Bloomberg data starting in 1973.
After briefly benefiting from safe-haven demand when Russia invaded Ukraine in late February, Treasuries lost value again as investors focused again on the possibility of four-decade high inflation eroding yields. . The Federal Reserve is expected to raise interest rates at least six times this year, starting with a 25 basis point hike next week. European public debt also tumbled this week after the European Central Bank surprised on Thursday by showing signs of an accelerated withdrawal of monetary stimulus in response to rising prices.
“Yields are reflecting a surprise upward shift in inflation expectations,” said Jim Caron, senior portfolio manager and chief global fixed income strategist at Morgan Stanley Investment Management. “Many thought that inflation would peak in the first quarter and fall. Now, with oil prices, inflation may still be high. In this context, it makes sense that bond yields are rising.”
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Two-year note yield has one of biggest weekly jumps since 2008
Yields across the Treasury curve have spiked this week. The two-year bond has risen about 27 basis points to around 1.75%, the highest level since September 2019, and the 10-year bond has gained about 25 basis points to 1.99% . The movements were driven almost entirely by rising inflation expectations. Yields on Treasury inflation-protected securities were relatively stable.
Futures market data suggests investors liquidated positions in the selloff, rather than establishing new ones. Open interest in Treasury futures has plummeted, especially in 10-year bond contracts and Ultra Bonds. This could indicate additional capacity to drive further cheapening of Treasuries.
Supply pressures contributed to the rise in yields this week, which included three Treasury bond auctions and one of the largest corporate bond offerings of history this week too marked the end of the Federal Reserve’s bond-purchase program — which absorbed nearly $3 trillion of Treasury debt in the last two years — and the possibility of the European Union carrying out massive joint bond sales to finance energy and defense spending.
Germany’s 10-year yield rose 32 basis points this week, and Australia’s 25 basis points. Global bond funds posted their biggest outflow in a year in the week to March 9, with European funds extending their longest outflow streak since the fourth quarter of 2018, according to data from EPFR Global. US bond funds posted a modest inflow, the data provider said.
“The move has been volatile as the market is torn between the impact of inflation and the impact of geopolitical risk and Fed rate hikes and balance sheet normalization,” said Margaret Kerins, head of fixed income strategy at BMO Capital Markets. “We expect this to continue through the middle of the year, as the market gains more clarity on inflation data and the duration of geopolitical risks.”
original note:
Treasury Market Has Lost a Year of Income in Punishing Week
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