T-bill yields break key level at 1.64%, highest in a year

T-bills fell again on Friday, sending 10- and 30-year yields to their highest level since early 2020, as growing concern that stimulus measures would spark an explosion in economic growth that kindles pressures on the prices. Inflation expectations over the next decade have hit a seven-year high.

Yields on the 10-year benchmark rose 10 basis points to 1.64% in US morning trading, a level not seen since February 2020. The 30-year rate rose nearly 11 points base to hit a high of 2.40%, peaking in January 2020. Rates surged on notes and bonds, the biggest long-term moves, deepening the steepening of the yield curve. The 10-year rate has failed to close above 1.60% since early 2020, although it has breached this volatile intraday trading level on several occasions in recent weeks.

“We are talking about a good number of stimulus measures – both fiscal and monetary – going forward,” said John Fath of BTG Pactual Asset Management, referring to the A $ 1.9 trillion pandemic relief bill and additional outlook, as well as the Federal Reserve’s promise to stay accommodating. “We could potentially grow a lot faster and inflation could come on the horizon a lot faster,” resulting in higher rates.

The breakeven rate on 10-year notes, a measure of market expectations for annual gains in consumer prices based on the spread of yield over inflation-linked debt, has exceeded 2.30 % at the start of trading in New York on Friday, a level it hasn’t crossed from the start. 2014. An equivalent measure for the five-year note reached its highest level since 2008.

Treasury bills remained under pressure after data showed US consumer sentiment improved in early March, more than expected, as the vaccine rollout and budget relief fueled optimism. Given the high level of stimulus and savings rates, the country could see “monster retail sales” as the economy opens up, Fath said. Market concern is that such a move could lead to a very steep yield curve as the Fed looks past short-term inflation and growth spikes, he added.

Australian spark

The global debt movement started in Australia, where bond futures fell before the market closed to put slight pressure on Treasuries. Around the same time, there was a block sell off of ultra 10-year bond futures, followed by a long put downside buyer – the hedging of which tends to weigh on the market. The three combined to tip 10-year Treasury futures to Thursday’s session low, triggering a wave of selling.

As many as 20,000 contracts changed hands over the next five minutes, the day’s biggest activity to date. The speed and severity of the move left many traders in awe as volumes in the spot market were relatively modest.

Movements there were most pronounced in some of the longer-term securities, with the yield curve steepening as two-year rates rose less than two basis points. The front end of dollar funding markets has remained relatively entrenched lately, with a flood of dollars and supply-demand imbalances in various money markets putting downward pressure on rates, and even causing repo levels below zero.

With Friday’s sudden spike, long-term Treasury yields surpassed levels seen after the disastrous seven-year U.S. bond auction on February 25. passage to the political decision of March 17 of the Federal Reserve.

Still, some point to the fundamentals exposed from this week’s sales as the reason to sell more. The indirect offer for the 10-year sale, a proxy for international participation since it includes foreign central banks, was the lowest since August.

“I was surprised to hear bullish comments on the US Treasury auctions because for me they showed a clearly bearish pattern,” said Althea Spinozzi, strategist at Saxo Bank A / S, who sees this week as consolidation before resumption of sales. “They have failed to show strong demand from foreign investors, leaving Treasuries prone to volatility as we head into FOMC week, where a 20-year sell-off and 10-year TIPS auction go. also test the market.

The Federal Open Market Committee meeting next week is expected to be the next major point of interest for traders. In his comments last week, the Fed chairman Jerome Powell noted the recent upward shift in bond yields, but said little to indicate that authorities are willing to oppose it at this point.

“The bond market is seeking a new equilibrium in light of vastly improved economic prospects in the United States and elsewhere,” said Kit Juckes, chief currency strategist at Societe Generale SA. “There will be no peace until we get 10-2% of the United States.”

– With the help of Todd Gillespie, Benjamin Purvis and Neil Chatterjee

(Updates throughout.)

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