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Bond Report: Bond yields rise as easing bank tensions reduce haven demand

Treasury yields rose on Monday amid reduced demand for the safety of government paper as tensions in the banking sector eased

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
3.912%

rose by 11.7 basis points to 3.896%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.454%

climbed 5 basis points to 3.427%.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.695%

added 2.5 basis points to 3.674%.

What’s driving markets

A calmer tone across markets as fading tensions over the banking sector was reducing demand for perceived haven assets, such as government bonds.

Treasury yields had fallen back of late after the failure of three U.S. banks, alongside the rescue-takeover of Credit Suisse
CS,
-1.23%
,
raised fears the sector’s travails would damage economic activity and encourage the Federal Reserve to begin cutting interest rates sooner than previously thought.

Markets are pricing in a 69% probability that the Fed will leave interest rates at a range of 4.75% to 5.0% after its meeting on May 3rd, according to the CME FedWatch tool.

The central bank is expected to take its Fed funds rate target to 4.9% by May 2023, and to have cut back to 4.1% by December, according to 30-day Fed Funds futures.

There are no notable U.S. economic updates set for release on Monday, but there will be some Fed-speak when Governor Philip Jefferson is due to deliver comments at 5 p.m. Eastern.

In Europe, German 10-year bund yields rose 6.5 basis points to 2.194% after the region’s bank shares rallied and a report showed the country’s business sentiment improving for the sixth consecutive month.

What are analysts saying

“In a time of incredibly elevated uncertainty, we once again see markets as underpricing the level of policy rates this year and have maintained our base case for policy rates to reach 5.50-5.75% despite an undeniably dovish March FOMC meeting even with a 25bp hike,” said Veronica Clark, U.S. economist at Citi in a note published late Friday.

“We saw the lack of change in SEP [summary of economic projections] forecasts as more reflecting substantially elevated uncertainty as opposed to a firm expectation that rates will only need to rise modestly further, if at all. While we do expect tightening of lending conditions to weigh on growth, this is unlikely to be reflected immediately in upcoming economic data, which should remain generally strong.”

“In particular, consistently strong upcoming inflation prints (core CPI 0.4-0.6%MoM) will make it hard for the Fed to pause rate hikes without risking credibility in fighting inflation after continuous comments on needing to see broad-based evidence that inflation is sustainably coming down,” Clark added.

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