NEW YORK: Treasuries extended their slump in New York, driving the yield on the benchmark 10-year note up by the most in more than three weeks, as renewed inflation concerns supported expectations for multiple Federal Reserve (Fed) rate hikes in coming months.
Intermediate-dated benchmarks led the slump in Treasuries with five, seven and 10-year yields rising by about 12 basis points (bps) as United States bond trading caught up with other financial markets after being shut Monday for the Memorial Day holiday.
Hawkish comments from Fed governor Christopher Waller was one factor spurring bond weakness, while the prospect of corporate debt sales also weighed on sentiment for Treasuries.
Reinforcing speculation that central banks are set to tighten policy during the summer, oil advanced to a two-month high while European inflation data for May exceeded economists’ forecasts.
“Inflation has become self-sustaining, and bringing it back under control will be harder and more painful than the central bank hopes,” Sonal Desai, chief investment officer for fixed income at Franklin Templeton, wrote in a research note.
“The Fed’s tightening cycle will be longer, and policy rates and bond yields will have to go higher than markets currently expect.”
Traders are almost fully pricing two half-point rate increases over June and July, and see even odds of a third such hike in September, swaps showed.
Despite yesterday’s selloff, the US 10-year yield is still about 35 bps below the high reached earlier this month. Investors are caught between elevated inflation and monetary policy tightening, which is aimed at slowing it but is also increasingly seen as a threat to the economy.
German bonds mirrored declines in their US counterparts after data showed eurozone inflation accelerated to an all-time high.
Benchmark 10-year yields rose seven bps to 1.12%, while the rate on equivalent Italian debt hit the highest in three weeks.
Money markets are pricing 115 bps of European Central Bank tightening by December. — Bloomberg