U.S. Treasury yields retreated and prices rose on Monday, offering a modest reprieve for government bonds that have been hurt amid worries about rising inflation as the economy recovers.
The Federal Reserve decision last week to allow banks to exclude Treasurys from their so-called supplementary leverage ratios also is likely to weigh on government bonds in coming months, experts said.
How are Treasurys faring?
- The 10-year Treasury note yield TMUBMUSD10Y,
1.690% was at 1.679%, compared with 1.729% to end Friday trade at 3 p.m. Eastern, retreating from its biggest weekly yield jump since Feb. 26, according to Dow Jones Market Data. - The 30-year Treasury bond yield TMUBMUSD30Y,
2.392% was at 2.387%, compared with 2.451% on Friday. - The 2-year Treasury note TMUBMUSD02Y,
0.149% was at 0.141%, versus 0.149% at the end of last week.
Bond prices fall as yields rise.
What’s driving the bond market?
Fixed-income investors have been closely watching comments from the Federal Reserve for guidance on the outlook for inflation even as many bet it might rise more rapidly than central bankers estimate.
Adding to the pressures on bonds is the impending end of capital relief for banks, which has been viewed as one factor behind the rise in yields, as it would remove a major buyer of Treasurys if banks are unable to exclude Treasurys and deposits held at the central bank from their so-called supplementary leverage ratios, or SLR, a key measure of balance-sheet strength.
As the Wall Street Journal explains, the SLR measures the total size of a bank balance sheet and sets a minimum capital requirement and relief, meaning banks could increase Treasury holdings without needing more capital.
There are more than $100 billion in government debt auctions slated for the week, which could provide the first test of the market’s appetite in the wake of the Fed’s announcement.
Meanwhile, the steady rise in bond yields has helped to create friction in the stock market, making highflying technology and tech-related stocks comparatively more expensive to own.
Last week, the Fed promised to keep rates lower for longer as the U.S. economy recovers from the COVID-19 pandemic but investors still fear that the central bank may have to move faster than it is anticipating if the economy runs hot.
Looking ahead, investors are awaiting further comments from Fed speakers, including those from Chairman Jerome Powell at 9 a.m. Eastern Time.
Markets also were keeping one eye on moves in emerging markets, after President Tayyip Erdogan replaced a hawkish central bank governor with one who favors low interest rates, sending Turkey’s lira USDTRY,
What are fixed-income analysts saying?
“Economic growth will be strong and inflation in the second quarter will be elevated due to the base effects,” wrote Richard Saperstein, chief investment officer at Treasury Partners, in emailed comments. “Almost one year ago, oil prices were negative, which will skew the upcoming inflation numbers. We expect inflation readings to moderate during the second half of 2021,” he wrote.
“Sovereign credit default swaps around the world—not just Turkey—are higher, but there were no sizeable flows to quality assets overnight. Instead, Turkey’s return to currency confusion adds to an international backdrop that has weighed against US-centric optimism for weeks, but has not retarded risk asset momentum,” wrote Jim Vogel, executive v.p. at FHN Financial.
