NEW YORK: After a tumultuous week of big yield swings and heightened volatility in the US Treasury market, investors are bracing for another hot inflation report, while the war in Ukraine increasingly casts a pall over Europe and the global economy.

       Russia’s Feb 24 invasion of Ukraine began to rewrite the script for US bond yields, some of which earlier in the month had climbed to the highest levels in more than a year in anticipation of Federal Reserve (Fed) interest-rate hikes to curb inflation beginning this month.

       The international campaign to cut Russia off from its resources stoked oil and agricultural commodity price increases that worsen the inflation outlook, but it also poses risks to the global financial system – where stresses began to appear – and growth that make investors want to buy Treasuries.

       The two-year note’s yield, which peaked last month at 1.64%, this week ranged from 1.26% to 1.56% and ended lower by more than nine basis points. The 10-year yield, less sensitive to changes in the Fed’s policy rate, dropped by 23 basis points, the most in a week since the onset of the pandemic in March 2020.

       The war in Ukraine “dominates the news cycle and no one knows how long it lasts,” said Molly Schwartz, portfolio manager at Western Asset Management Co.

       “There is also the Fed and its inflation problem,” which rising commodity prices threaten to prolong.

       “Their job is one of being reliable, predictable and not scaring the market.”

       The market is already expecting further upheaval in yields. A measure of implied Treasury volatility stands at levels last seen during the tumult of March 2020.

       The crisis also unleashed a fresh wave of demand for Treasury inflation-protected securities (Tips), whose performance had stalled amid the signs that Fed policy makers were prepared to crack down on the trend in consumer prices. The yield on five-year Tips fell to a 2022 low on March 1, and the average expected inflation rate it implies closed above 3.3% for the first time.

       For now, the war in Ukraine and the exclusion of Russia’s economy from Western capital and markets via sanctions has spurred huge demand for the dollar and Treasuries despite the inflation threat and strong US job-creation data for February released last Friday.

       The prospect of US currency scarcity in money markets fuelled a gain of 1.3% in the past week, while the euro plunged more than 3% ahead of this week’s European Central Bank policy meeting.

       Meanwhile, US central bankers are in a communications blackout until their mid-month policy meeting. — Bloomberg