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Bond Report: Treasury yields bounce across the board after breaking string of 3 consecutive weekly rises

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Treasury yields moved higher Monday as data on durable-goods orders topped expectations and auctions of new supply met tepid demand.

What yields are doing

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.205%

rose 6.8 basis points to to 3.193% at 3 p.m. Eastern on Friday. Yields and debt prices move opposite each other.

The yield on the 2-year Treasury note
TMUBMUSD02Y,
3.119%

gained 6.4 basis points to trade at 3.121% Monday afternoon. The 2-year yield dropped 10.7 basis points last week, its largest weekly drop since the period that ended March 20,2020, based on 3 p.m. levels, according to Dow Jones Market Data.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.322%

rose 4.4 basis points to 3.304%.

What’s driving the market

Data released on Monday showed that durable goods orders rose 0.7% in May, a stronger than expected reading that showed manufacturers still had plenty of demand for their products. Meanwhile, U.S. pending home sales rebounded last month, reversing a six-month decline.

Investors continue to weigh recession fears versus worries over inflation. Last week, recession worries appeared to jump as Federal Reserve Chairman Jerome Powell told lawmakers that achieving a “soft landing” for the economy would be a difficult challenge.

Read: Recession is challenging inflation as top fear among stock and bond investors

Auctions of $46 billion of 2-year notes and $47 billion of 5-year notes were both met with soft demand.

“Just like the 2-year this morning, the 5-year generated weak results, with soft Indirect demand, about-average Direct demand, and Dealers stuck with more supply than they’d like as a result,” wrote Thomas Simons, money-market economist at Jefferies, in a note.

The Federal Reserve has moved aggressively to raise the fed-funds rate and delivered a hike of 75 basis points, or three-quarter of a percentage point, in June, its largest since 1994, after a half-point rise in May and a quarter-point rise in March. The Fed also started shrinking its balance sheet this month.

The central bank’s preferred price gauge, the core personal-consumption expenditures, or PCE, inflation reading for May is due on Thursday morning.

What analysts say

“The process of translating higher policy rates into a cogent forecast for growth has become particularly challenging given the realities of a Fed poised to push target funds to levels not seen since at least 2008,” wrote strategists Ian Lyngen and Benjamin Jeffery at BMO Capital Markets.

“This issue is less of one related to the outright level of rates as much as it is of the parallels (or lack thereof) between the state of the U.S. economy now versus 14 years ago,” they wrote. “Inflation is high, unemployment is low, however real GDP expectations both domestically and abroad are quickly coming under pressure with recessionary fears far more topical than one might have assumed as recently as the June 15 FOMC meeting during which 75 bp was deemed the most prudent path for policy rates in light of the balance of risks. Investor sentiment has shifted quickly in terms of the outlook and we’re increasingly of the mind that the peaks for U.S. rates have been established.”

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