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Bond Report: 10- and 30-year Treasury yields pull back from three-year highs amid pause in bond selloff

The 10-year Treasury yield dropped by the most in almost three weeks on Wednesday, pulling away from its highest level in more than three years as buyers returned to the government bond market.

The 30-year bond had its biggest one-day drop in nearly two months. Meanwhile, Treasury’s $16 billion 20-year auction found “a spark of life,” with an “excellent” sale, according to FHN Financial’s Jim Vogel.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.915%

declined 7.5 basis points to 2.836% from 2.911% at 3 p.m. Eastern on Tuesday. It was the largest decline since March 29, based on 3 p.m. yields, according to Dow Jones Market Data. Tuesday’s level was the highest since Dec. 13, 2018.

The 30-year Treasury bond
TMUBMUSD30Y,
2.884%

declined 11.2 basis points to 2.876% from 2.988% late Tuesday. It was the largest decline since Feb. 28. Tuesday’s level was the highest since April 22, 2019.

The 2-year Treasury note yield BX:TMUBMUSD02Y rose by less than 1 basis point to 2.577% versus 2.573% on on Tuesday afternoon, remaining at its highest since Jan. 28, 2019.

What’s driving the market?

Long-dated Treasury yields pulled back as government bond-buying mostly resumed on Wednesday, following a sharp selloff in the prior session that had pushed yields to their highest since 2018-2019.

Markets have been generally adjusting to the prospect of higher interest rates from Federal Reserve policy makers who are attempting to combat inflation, now running at its highest in four decades. On Wednesday, Mary Daly, president of the Federal Reserve’s regional bank in San Francisco, said the central bank is likely to raise its key interest rate to as high as 2.5% by year-end in a bid to help douse raging U.S. inflation.

The Fed’s Beige Book, a compilation of anecdotal economic activity, showed the U.S. grew steadily through early April, but high inflation showed little sign of relenting in “the coming months.” Meanwhile, data released earlier in the day revealed existing home sales decreased 2.7% between February and March, dropping to a seasonally adjusted, annual rate of 5.77 million.

Russia’s invasion of Ukraine has exacerbated inflation fears, sending oil and other commodity prices soaring over recent months.

What are analysts saying?

“While we are confident that inflation will fall back sharply in the second half of this year, that will not stop the Fed delivering a series of 50bp rate hikes at its upcoming meetings,” said Paul Ashworth, chief North America economist for Capital Economics.

“With core inflation not on track to fall all the way back to the 2% target any time soon, we think the Fed will still need to follow through on its plans for a series of aggressive rate hikes,” Ashworth wrote in a note. “Later this year, it should become clearer that economic growth is running well below potential and those cyclical inflationary pressures will begin easing more markedly, freeing the Fed to switch back to 25bp increases from the September meeting onwards.”

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