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Bond Report: Treasury yields bounce back after Germany’s double-digit inflation report


Treasury yields rose on Thursday, led by the policy-sensitive 2-year rate, after a double-digit inflation report from Germany reignited broader concerns about persistent price gains and the likelihood of aggressively higher U.S. interest rates.

What’s happening

The yield on the 2-year Treasury

rose 7.6 basis points to 4.168% from 4.092% on Wednesday. The yield is up 13 of the past 16 trading days,

The yield on the 10-year Treasury

climbed 4 basis points to 3.747% from Wednesday’s level of 3.707%.

The yield on the 30-year Treasury

advanced 1.3 basis points to 3.693% from 3.680% Wednesday afternoon.

Thursday’s levels are the third-highest of the year for the 10- and 30-year rates, according to Dow Jones Market Data.

What’s driving markets

Investors remain concerned about central banks aggressively lifting interest rates to damp inflation running near its fastest pace in 40 years. Data from Germany showed inflation coming in above 10%, which led to Thursday’s selloff in government bonds, pushed yields up, and contributed to the declines in all three major U.S. stock indexes. Meanwhile, Wednesday’s broad bond rally, sparked by the Bank of England’s intervention to support the gilt market, faded.

German 10-year bund yields

rose 6 basis points to 2.178%. Equivalent duration U.K. gilts

advanced 13 basis points to 4.142% as worries about the extra issuance required to fund the government’s inflationary budget refused to dissipate.

In the U.S., data released on Thursday confirmed that the world’s largest economy shrank in the first half of 2022, based on revised figures. Gross domestic product fell at a 0.6% annual clip in the second quarter; that’s unchanged from the prior estimate. The previously reported 1.6% decline in first-quarter GDP was also unchanged.

In addition, initial jobless claims fell by 16,000 to 193,000 in the week ended Sept. 24; that’s the lowest level of claims since late April.

On Thursday, James Bullard, president of the Federal Reserve Bank of St. Louis, defended the central bank from claims that its aggressive interest rate-hike policy is creating impossible conditions for foreign central banks, by saying there were no surprises this year compared to other tightening cycles.

Fed-funds futures traders are pricing in a 62% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4% on Nov. 2. The central bank is also mostly expected to take its fed-funds rate target to at least 4.5% to 4.75% by March, according to the CME FedWatch tool.

See also: Fed’s Mester cool to talk of potential ‘pause’ in rate hikes

What analysts are saying

Treasurys “started the overnight session modestly weaker, and once London came online the selling pressure accelerated and 10-year yields bounced after nearly filling the opening gap we had been monitoring as resistance,” said BMO Capital Markets rate strategists Ben Jeffery and Ian Lyngen.

Ten-year yields are finding “a period of dynamic equilibrium in what we’ll characterize as the current trading range from 3.7% to 4%,” they wrote in a note.

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