By William Watts
Treasury yields remain up sharply in 2022, but pulled back Friday, as a stock-market selloff appeared to prompt buying interest in government debt and as investors prepared for next week’s meeting of Federal Reserve policy makers.
What are yields doing?
The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.44% fell to 1.747%, compared with 1.833% at 3 p.m. Eastern Time on Thursday and 1.771% at the end of last week. The yield traded at a more-than-two-year high near 1.9% on Wednesday. The pullback left the yield up 25.1 basis points so far in the new year.
The 2-year Treasury yield /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -0.63% was 0.993%, versus 1.049% on Thursday afternoon, which was its highest finish based on 3 p.m. levels since Feb. 27, 2020, according to Dow Jones Market Data. The 2-year rate rose 2.8 basis points for the week.
The yield on the 30-year Treasury bond /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -1.45% fell to 2.062%, compared with 2.14% late Thursday, logging a weekly decline of 5.2 basis points.
What’s driving the market?
The selloff in Treasurys that has driven yields—which move opposite to prices—sharply higher to begin the new year took a pause. The move higher in yields has been driven by signals the Federal Reserve will be much more aggressive than previously expected in raising interest rates and otherwise tightening monetary policy in response to persistently high inflation.
The Fed meets on Tuesday and Wednesday of next week, with policy makers expected to lay the groundwork for a rate increase when they gather again in March.
The sharp run-up in yields has been seen as a trigger for a stock-market stumble, particularly for tech and other so-called growth stocks. Growth stock valuations are based on expectations for cash flow far into the future. When Treasury yields rise, the value of that future cash is discounted.
The tech-heavy Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +1.59% fell into correction territory earlier this week, after falling more than 10% from its November record high. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.98% is down 4.5% for the month to date through Thursday, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.86% has slid 6%. Stocks attempted a rebound in Thursday’s session, but suffered a late reversal that left major indexes in the red.
Equities extended their decline Friday, with all three major indexes posting hefty weekly losses.
But analysts said the selloff in equities appeared to reach a threshold where it prompted some modest haven-related buying interest in Treasurys, a shift that appeared in Thursday’s session and continued on Friday.
The economic calendar was light, featuring only the Conference Board’s December leading economic index, which rose 0.8% , in line with forecasts and signaling steady growth even as the spread of the omicron variant of the coronavirus nibbled at economic activity.
What are analysts saying?
Thursday’s market action saw investors flip the equity/rate dynamic “where selling in large cap tech companies was accompanied by constant bond selling,” said Jim Vogel, executive vice president at FHN Financial, in a Friday note. But the recent “quick move to bonds on elevated risk has not changed long bond technicals that still have a wide open range. For 10s, that’s still 1.74%-1.95% through the first week of February,” he said.
“Bond investors will perhaps be keen to not get too carried away with themselves ahead of next week’s FOMC meeting, which may shed greater light on the bank’s plans for the coming year,” said Matthew Ryan, senior market analyst at Ebury, in emailed comments.