Treasury short-end yields surge while 30-year rate tops 3% mark

Treasury yields surged across the curve Tuesday, with short-end rates leading the way higher, while the rate on the benchmark 30-year bond rose above 3% for the first time in three years.

Endless inflation pressures — fueled by the war in Ukraine and the prolonged supply-chain chaos — have bolstered expectations for policy tightening by the Federal Reserve. Officials are due to meet in early May and are widely expected to lift their overnight benchmark by a larger-than-normal 50 basis points, with further increases priced in across subsequent gatherings.

Chicago Fed President Charles Evans on Tuesday said he supported getting the target range for the main policy rate up to around 2.25% to 2.5% by year end from its current 0.25% to 0.50% range.

Money markets already betting on an almost half-point Federal Reserve rate hike next month also received a wake-up call Monday from St. Louis Fed President James Bullard who said a three-quarter-point increase shouldn’t be ruled out. The last increase of such magnitude was in 1994.

“The comments from James Bullard has the market trying pricing in a bit more risk into the front end,” said Margaret Kerins, head of fixed-income strategy at BMO Capital Markets. “While there’s also questions about how the Fed’s upcoming debt roll off will go and just how Treasury will make up the lost financing that is adding risk premium to the long end. Adding to that is focus on the mortgage market given how high mortgage rates have gone.”

U.S. 30-year mortgage rates are surging this year and topped 5% this month for the first time in more than a decade.

“A tight labor market and above-trend growth this year should support housing, yet higher market interest rates and ongoing Fed tightening will likely be headwinds to the sector,” said Michael Darda, the chief economist at MKM Partners. “Indeed, the Fed has said it intends for housing to slow and will continue tightening until it does so.”

The moves in Treasuries also came as the International Monetary Fund boosted its global inflation projection while slashing its growth forecast. U.S. housing data released Tuesday was stronger than predicted.

The yield on the 30-year security on Tuesday climbed as much as 8 basis points to just over 3%, cracking that mark for the first time since April 2019. The 20-year bond earlier became the first benchmark security to eclipse 3% in the current cycle of rising rates, initially breaching the level on April 11.

The two-year rate climbed as much as 11 basis points to 2.56%, before paring gains. There’s also been a wave of new debt issuance from banks and corporations, trying to lock in rates before they rise too far. That’s added to upward pressure on Treasury yields.

“The market is challenging the Fed’s ability to contain inflation as policy lags the surge in realized inflation,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA. “The market is also re calibrating to balance-sheet runoffs which is likely contributing to the steepening of the curve”

As well as hoisting rates, the Fed’s plan to whittle down its holdings of Treasuries amassed via purchases that were ramped up at the start of the pandemic will require the investing public to buy more. The Fed owns almost $5.8 trillion of Treasuries and $2.7 trillion in agency mortgage-backed securities, and plans to shrink its portfolio at the rate of more than $1 trillion a year by not replacing securities as they mature.

The dollar surged against the yen, which is in the midst of an unprecedented losing streak. Japan’s currency slid for a 13th day against the dollar, the longest run of losses in Bloomberg data starting in 1971. The drop of over 1% on Tuesday came even after Japan’s Finance Minister Shunichi Suzuki stepped up verbal defense of the currency, with traders looking for more concrete signs of intervention.

Bonds across the globe reeled from the prospect that central banks will need to tighten policy aggressively to contain skyrocketing inflation. U.K. 10-year yields were within a whisker of touching 2% for the first time since 2015 while their shorter five-year peers surged to the highest since the aftermath of Scotland’s failed independence referendum in 2014. German benchmark yields were less than 10 basis points away from hitting 1% for the first time in seven years.

Traders expect U.S. policy makers to hike the fed funds rate by more than 200 basis points by year-end, in addition to last month’s quarter-point increase. Money markets are also betting the Bank of England will raise the bank rate by almost 150 basis points, having already tightened by three-quarters of a point. Meanwhile, the European Central Bank is expected to raise borrowing costs a quarter-point in September and December.

“Looking at 3% to 3.25% for the 10-year, it’s becoming a distinct possibility, we get to those levels before value buyers show up,” said George Goncalves, head of U.S. macro strategy at MUFG Securities Americas. “Today’s story is Bullard and the global selloff in bonds.”