Bond Report: Most Treasury yields rise, with 10-year rate above 2.3%, as Biden rolls out more sanctions against Ukraine

What are yields doing?

• The yield on the 10-year Treasury note TMUBMUSD10Y, 2.361% rose 2 basis points to 2.34% from 2.32% at 3 p.m. Eastern on Wednesday. The yield is up 11 of the past 14 trading days, and is at its second-highest level this year.
• The yield on the 2-year Treasury note TMUBMUSD02Y, 2.134% advanced less than 1 basis point to 2.122% from 2.113% on Wednesday afternoon. The yield is up 14 of the past 17 trading days.
• The 30-year Treasury bond yield TMUBMUSD30Y, 2.526% declined 1 basis point to 2.51% from 2.52% late Wednesday. It’s down 8.2 basis points over the last two trading days, the largest two-day decline since March 4, based on 3 p.m. levels, according to Dow Jones Market Data.

What’s driving the market?

Biden met with leaders of the North Atlantic Treaty Organization on Thursday for the first in a series of meetings with European allies and other world leaders responding to Russia’s Feb. 24 invasion of Ukraine. Biden called for Russia to be expelled from the Group of Twenty forum of the world’s largest economies, as his administration rolled out more sanctions against Vladimir Putin’s country.

Russia’s invasion and the resulting sanctions have helped fuel a surge in commodity prices that are adding to inflation worries while also raising concerns about the outlook for economic growth.

Meanwhile this week, Federal Reserve officials underscored the prospect of raising benchmark interest rates at an even faster pace than they signaled after last week’s policy meeting. On Monday, Fed Chairman Jerome Powell said the Fed could move rates up by more than a quarter point at future meetings if deemed necessary.

On Wednesday, San Francisco President Mary Daly said “everything is on the table” for the central bank’s May meeting, including a half percentage point rate rise and an announcement about the plan to shrink the Fed’s nearly $9 trillion balance sheet. Cleveland Fed President Loretta Mester said the Fed could continue “front-loading” rate hikes in the first half of the year and start reducing its portfolio at the same time, without causing market disruptions.

On Thursday, Chicago Fed President Charles Evans said he expects the equivalent of six more 25 basis point increases in the central bank’s policy interest rate by year-end and three more next year. Those increases would put the Fed funds rate in a range of 2.75% to 3% by the end of 2023.

In data releases Thursday, initial jobless benefit claims fell by 28,000 to 187,000 in the week ended March 19; that’s the lowest level since September 1969. U.S. durable-goods orders dropped 2.2% in February. And S&P Global’s March manufacturing and services purchasing managers index readings rose to 58.5 and 58.9, respectively.

What do analysts say?

“This Fed cycle has been very unusual in that the market has been able to price a complete hiking cycle — including high probabilities of 50bp hikes, a large quantitative tightening (QT) program, and three rate cuts beyond 2023 — almost all before the first hike was even delivered,” said B. of A. Securities rate strategist Ralph Axel. “In our view, this implies that much of the market impact should now be baked in.”

“The current level of 2-10 slope was reached only after about three years of hikes during the 2015-18 cycle,” he wrote in a note. “As a result, we believe investors should not be looking at the Fed delivery of hikes and QT as the main market-movers for this year, whether it’s rate levels, curve slope, swap spreads or even other asset classes. Instead, we believe the evolving inflation outlook — in either direction — will be the main driver as will expectations around soft-landing vs hard-landing.”