Treasury yields jumped on Tuesday, led by 1- and 2-year rates, as traders bet that easing banking-sector angst will allow the Federal Reserve to raise interest rates by a quarter-of-a-percentage-point this week and in May.
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The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.174%
soared 25.3 basis points to 4.175% from 3.922% as of Monday. That’s the biggest one-day jump since June 5, 2009, based on 3 p.m. figures, according to Dow Jones Market Data. -
The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.600%
jumped 12.6 basis points to 3.603% from 3.477% Monday afternoon. That’s the largest one-day gain since Feb. 21. -
The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.730%
rose 7.4 basis points to 3.734% from 3.66% late Monday.
What drove markets
Traders focused on waning bank stress, which reduced demand for perceived safe-haven assets and pushed up Treasury yields on Tuesday. Financial markets traded on the view that the Federal Reserve can continue to raise interest rates this week and again in May, as it maintains its battle against inflation.
The trend was broad, with 10-year German bund yields
TMBMKDE-10Y,
adding 17.7 basis points to reach 2.296% and equivalent-maturity U.K. gilts
TMBMKGB-10Y,
up 5.7 basis points at 3.369%.
Traders priced in an 84.9% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on Wednesday, according to the CME FedWatch tool. They also saw a 57.6% chance of the central bank taking its fed-funds rate target to between 5% and 5.25% by May, and pulled back on the number of rate cuts they expect for this year, according to 30-day fed funds futures.
Tensions in government bond markets remain, however. As of Monday, the ICE BoAML MOVE index, a gauge of expected Treasury market volatility, was at one of its highest levels since late 2008 and up more than 80% since the start of February.
Data released on Tuesday showed that existing-home sales rose for the first time in 13 months, with a 14.5% surge in February fueled by a brief drop in mortgage rates.
What analysts are saying
“The Fed faces a tough decision this week,” said Michael Weisz, co-founder and president of Yieldstreet, a platform for private-market investing. “On one hand, inflation has been consistently telegraphed as the number one objective, and a further increase would instill a sense of commitment.” On the other, “there is a real fear of continued contagion in the banking sector, and a pause would certainly provide welcomed stability, even as it invites criticism as a 180 [degree turnabout]. Overall, we will be focused on commentary from Jerome Powell on his thoughts on a go-forward strategy, regardless of the current rates decision.
“While there remains concern over the banking industry, capitalization levels and increased lending availability stemming from the Bank Term Funding Program (BTFP) may prove [to be] enough offset for the Fed to push ahead with its rate hikes,” Weisz wrote in an email.
