2 and 10-year Treasury yields hit one-week lows, forward of begin to Fed assembly


US Treasury yields fell mostly on Monday as global stocks swooned – but then rallied sharply – and investors waited for a key two-day Federal Reserve meeting, the first of the young year, which is due to begin on Tuesday .

Rising global tensions and heightened volatility in domestic and international equities are likely to anchor yields lower.

What are returns doing?
  • The 10-year Treasury note returned TMUBMUSD10Y, 1.768% 1.735%, down 1.2 basis points from 1.747% as of 3:00 p.m. ET on Friday, marking its lowest return since Jan. 13. Yields fall when bond prices rise.

  • The interest rate on 2-year Treasury bills TMUBMUSD02Y, 1.020% stood at 0.950%, down 4.3 basis points from 0.993% at the end of last week. Short-dated bonds also posted their lowest yield since Jan. 13.

  • 30-year government bond TMUBMUSD30Y, 2.105%,
    known as the long bond, returned 2.083%, up 2.1 basis points from Friday’s 2.062%.

What moves the market?

A strong afternoon auction of short-dated debt increased appetite for Treasuries and helped push yields briefly lower, but rates rebounded over the course of the session and stocks swung from losses to eventual gains, recovering from the brink of an intraday slide .

A sale of $54 billion in two-year notes showed strong demand, with the so-called bid-to-coverage ratio at 2.81 times, the highest since April 2020, well above the average bid-to-coverage ratio. Coverage ratio of 2.47 lay data compiled by Jefferies. The bid-to-cover ratio reflects the demand from buyers versus the volume of notes sold as a measure of the success of the auction.

Above-average bidding is usually a sign of a robust appetite for debt.

The auction came as investors prepare for the two-day meeting of Fed policymakers ending Wednesday, which will likely serve to lay the groundwork for a move away from the easy-money stance this year, without to take political action.

While members of the rate-setting Federal Open Market Committee are likely to reiterate investor expectations for a March rate hike, the first hike since December 2018, policymakers are not expected to tamper with policy rates, which currently hover between 0% and 0.25% for now or begin to shrink their balance sheet from nearly $8.9 trillion until likely after June after the current bond-buying program ended in March.

However, the FOMC will set the tone for the coming months of likely policy changes, highlighting both the pace and intensity of the tightening effort to quell rising inflationary pressures as global equities ease.

Goldman Sachs analysts are forecasting four rate hikes in 2022, but see a risk of more rate hikes due to the surge in inflation. Market-based projections currently show that investors are also expecting four interest rate hikes this year.

Meanwhile, the world appears to be awash with risk, which could also fuel demand for safe havens and sap appetites for perceived risky assets like equities.

Over the weekend, the US State Department ordered US personnel’s families to leave Ukraine amid growing concerns over a possible Russian invasion and the US threatening sanctions if Moscow invades its neighboring country. And the United Arab Emirates said it intercepted two ballistic missiles aimed at its capital, Abu Dhabi, with Houthi rebels accused of fueling conflict in the region.

See: How a Russian invasion of Ukraine could trigger market shockwaves

Meanwhile, economic reports released Monday showed the US economy slowed in January as the Omicron wave of the COVID-19 pandemic exacerbated delivery delays and labor shortages. IHS Markit’s flash manufacturing purchasing managers’ index fell to 55.0, a 15-month low, while the services index fell to 50.9, a 18-month low.

Separately, shares in the sector’s largest $18.4 billion iShares iBoxx $ High Yield Corporate Bond ETF HYG fell 0.1% in a tumultuous session on Monday, adding to their previous January 1.9% drop at.

What strategists say
  • “All have released their Fed forecasts, both in the strategy articles for 2022 and ahead of this week’s meeting. While most are “all else equal” analyzes in response to the current high inflation rates, we know historically that for every action there is always an equal and opposite reaction, as one of Newton’s laws says,” wrote Peter Boockvar, Chief Investment Officer at Bleakley Advisory Group, in a research note Monday. “So bottom line and my 2 cent prediction, I think after the end [quantitative easing] and initiate 50-75 basis points of rate hikes, the Fed will then see the economic and market reactions and see where the yield curve is. Then, when the curve has flattened, they start [quantitative tightening] in an attempt to make it steeper. If the curve is still steepening because the market thinks they aren’t tightening enough, they will make more rallies,” he wrote.

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