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Bond Report: 10-year Treasury yield tops 2.9% for first time since December 2018 as traders price in higher interest rates

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Long dated Treasury maturities sold off further Tuesday, taking the yield on the 10-year note above 2.9% for the first time since 2018, as traders priced in the prospects of aggressively higher U.S. interest rates to control inflation.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.946%

was at 2.911%, up from 2.861% at 3 p.m. Eastern on Monday, which was its highest since Dec. 14, 2018. The yield briefly traded above 2.9% in earlier activity Tuesday.

The yield on the 2-year Treasury note
TMUBMUSD02Y,
2.614%

was 2.531%, up from 2.458% Monday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.018%

was at 3%, up from 2.951% late Monday.

What’s driving the market?

Treasurys have sold off sharply in 2022, driving yields higher as investors wrestle with U.S. inflation running at its hottest in four decades. The Federal Reserve is expected to deliver a series of benchmark interest rate increases in coming months and has said it will implement a plan to begin reducing the size of its balance sheet as it removes the extraordinary accommodation put in place in response to the COVID-19 pandemic in early 2020.

St. Louis Federal Reserve Bank President James Bullard, who has led calls for aggressive rate rises by the central bank, late Monday repeated that he would like to see the fed funds rate, which stands in a range of 0.25% to 0.5% after a quarter-point hike in March, at 3.5% by year-end — a move that would require a series of outsize, half percentage point rate increases.

Bullard, speaking at a virtual event held by the Council on Foreign Relations, also said “quite a bit has been priced in” when it comes to expected Fed actions. He also didn’t rule out the possibility of a 75 basis point increase in the fed funds rate at some point, but said he didn’t think such a move would be necessary.

Russia has began a new phase of its invasion by launching a full-scale ground offensive to take control of Ukraine’s industrial heartland, the Donbas. The focused attack on the eastern Ukraine region was expected when Russian forces withdrew from the area around the capital Kyiv after being stopped by Ukrainian forces.

The invasion has sparked a sharp rise in prices of oil, grain and other commodities, stoking inflation pressures globally.

U.S. home builders started construction on homes at a seasonally-adjusted annual rate of roughly 1.79 million in March, representing a 0.3% increase from the upwardly-revised figures for the previous month, the U.S. Census Bureau reported Tuesday. Compared with March 2021, housing starts were up nearly 4%.

Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari were both scheduled to speak Tuesday.

What do analysts say?

“We are really now in the countdown to the Fed’s meeting on May 4th and, the day after that, a meeting at the Bank of England. The market in the U.S. looks perfectly set up for a 50-bps rate hike from the Fed and with few Fed speakers this week to muddy the waters, we’d expect limited market ructions should the Fed lift rates by 50-bps early next month,” said Steven Barrow, head of G-10 strategy at Standard Bank, in a note.

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