Treasuries are richer as inflation worries move to background. Overall, however, as you can see in the year to date chart below, Treasury yields have been sliding lower turning flattened. Treasury yields, despite some intraday near-term bids seen this week with the long end leading the rally in a bull flattener as the upcoming supply held the front end in check, continued to retreat from the recent highs seen in mid-May.
This week the Treasury yields slid lower, paced by the long end in a bull flattener. The long end continues to lead the way in a bull flattener with the curve at 143 bps from 145 bps yesterday and 150 bps last week, as bond investors are also more comfortable with the Fed’s transitory view of inflation. Yields have continued to retreat from the recent highs seen in mid-May after CPI. The 10- and 30-year rates are 1.7 bps richer at 1.582% and 2.281%, respectively, some of the lowest levels in a couple of weeks, while the wi 2-year is at 0.160%.
A continued easing in Treasury yields as worries over inflation diminish, for now, are supporting risk-on flows. Indeed, the stress over inflation following the pop in CPI and resulting jump in yields has shifted to the background. Additionally, expectations for a strong recovery amid the continued success of vaccinations domestically are also lifting sentiment.
As explained in the past, Yield Curves reflect investor expectations about future developments in the bond markets and their perceptions of overall risk. Basically, the idea is that the longer the bond duration the higher the yield should be in order to cover the extra cost of keeping the bond for a long time; thus, longer duration bonds should have higher yields than short-term bonds.
Still, this is not always the case, and this is where expectations enter the equation: if bond market participants are expecting interest rates to hike in the future, they would like to avoid having their funds in the higher-yielding longer-duration bonds. Thus, investors stay away from the longer duration bonds, hence lower demand and then their prices decline and their yield rises, hence higher interest rates.
The point to be made is straightforward: if growth rises above 2% the Fed will likely proceed with some rate hikes, in order to boost domestic consumption. This could pressure Treasury yields, helping the Greenback to retrace.
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Andria Pichidi
Market Analyst
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