By Vivien Lou Chen and Mark DeCambre
The two-year Treasury yield notched its biggest weekly gain since October 2019, but dropped on the day, as investors focused on the prospects of multiple rate increases from the Federal Reserve this year, starting in March.Yields from two to 30 years out slipped on Friday after data showed U.S. consumer sentiment slumping to a new 10-year low and the Fed’s preferred inflation gauge leaping 5.8% in 2021 to a 40-year high.
What are yields doing?
The 2-year Treasury note BX:TMUBMUSD02Y yield fell 2 basis points to 1.170% from 1.190% a day ago. It rose 17.7 basis points this week, the largest weekly gain since the period that ended Oct. 11, 2019, based on 3 p.m. levels, according to Dow Jones Market Data.
The 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.09% yield dropped 2.8 basis points to 1.779% from 1.807% at 3 p.m. Eastern Time on Thursday.
The 30-year Treasury bond rate /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +1.07% fell less than 1 basis point to 2.083% from 2.09% Thursday afternoon.
For the week, the 10-year yield rose 3.2 basis points and the 30-year rate gained 2.1 basis points — their largest one-week gains since the period that ended Jan. 7.
What’s driving the market?
Most Treasury yields slipped on Friday as economic data capped a volatile week highlighted by a hawkish Federal Reserve. The University of Michigan’s gauge of consumer sentiment fell to a final January reading of 67.2, down from an initial reading of 68.8 and well below December’s number of 70.6. Friday’s figure represents the lowest level of consumer sentiment since November of 2011, and came as inflation concerns build. The personal-consumption expenditures index of inflation soared 5.8% in 2021, the fastest pace since 1981. The surge in inflation is being underpinned by persistent shortages of supplies and labor.A narrower measure that omits volatile food and energy costs, known as the core PCE, rose by 0.5% in December, matching the 0.5% forecast seen by economists polled by The Wall Street Journal. For all of 2021, the increase in the core rate totaled 4.9%, compared to a mild 1.5% gain in the prior year. That’s the highest annual level since 1982. The Fed views the PCE index — the core rate in particular — as the most accurate measure of U.S. inflation.
Friday’s drop in most yields follows Wednesday’s policy update from the rate-setting Federal Open Market Committee, which pointed to the start of a steady increase to interest rates, which could begin as early as mid-March, as the central bank battles pricing pressures. BofA economists now see seven 25-basis-point interest rate hikes this year, or one at each remaining Fed meeting, though that view is far from consensus.
Investors have been attuned to the recent flattening of the Treasury yield curve, with the spread between 2- and 10-year rate shrinking to 61 basis points on Friday. Minneapolis Fed President Neel Kashkari said the flatter curve is a sign that the Fed won’t have to raise rates very high in order to get to a “neutral” level, in which the central bank’s policy rate is not spurring growth or causing a contraction.
What strategists are saying
“This past week, like much of the month, was dominated by an increasingly hawkish Fed,” said Deutsche Bank strategist Karthik Nagalingam. “Fed Chair Powell made some waves in his press conference when noting that this hiking cycle is already very different than the ones of the recent past due to a much stronger starting point for both the economy and labor market, along with much higher inflation.”“This means that this hiking cycle could look more similar to those of 40 years ago in the 80s and 70s,” Nagalingam wrote in a note. “This increases the probability of back-to-back rate hikes, which is our new house view for this Spring, and/or possibly larger increments.”