Bond Report: Treasury yields turn mixed to kick off the week

Treasury yields turned mixed early Monday, with traders bracing for more volatility as concerns rise over whether the Federal Reserve has fallen behind the curve in fighting inflation.

What are yields doing?

The yield on the 10-year Treasury note

was little changed at 1.582%, compared with 1.583% at 3 p.m. Eastern on Friday. Yields and debt prices move in opposite directions.

The 2-year Treasury note yield

edged down to 0.516%. It ended Friday afternoon at 0.522%, its highest 3 p.m. finish since March 18, 2020, according to Dow Jones Market Data, as it posted the largest weekly rise since October 2019.

The yield on the 30-year Treasury bond

rose to 1.962%, compared with 1.955% on Friday.

What’s driving the market?

Inflation worries remained front and center, amplified by the release last Wednesday of the October Consumer Price Index, which showed a much hotter-than-expected 6.2% year-over-year rise, the fastest in nearly 31 years.

Treasurys turned mixed early Monday following last week’s selloff that drove up yields, particularly at the short end of the curves. Analysts said bond-market volatility is likely to continue to rise, potentially sending ripples into other asset markets.

In the Treasury market, the frontloading of rate-hike expectations is stoking worries that the Fed will be forced to act aggressively, potentially sparking an economic downturn. As a result longer-dated yields have remained largely steady, while real, or inflation-adjusted yields, have fallen toward all-time lows at the long end.

The New York Fed’s Empire State Index rebounded in November, rising 11.1 points to 30.9. Economists had expected a reading of 22, according to a survey by The Wall Street Journal. The economic calendar this week includes October retail sales data on Tuesday, along with industrial production.

What are analysts saying?

“Bond market volatility is now up to the highest we’ve seen since the intense COVID period last spring and, indeed, is much higher than much of what we’ve seen over the past five years,” said Steven Barrow, head of G-10 strategy at Standard Bank, in a note.

“That’s understandable,” he wrote. “Investors not only have the uncertainty of the monetary tightening process to figure out at the front end of the curve, but also the juxtaposition of high inflation with signs that growth is faltering. It might be a long way from the stagflation fear that must be every investors’ worst nightmare, but it is likely to keep volatility high in the bond market and elsewhere.”

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