Yields on 2- and 10-year Treasuries fall below 3% as recession fears dominate financial markets

Bond yields fell on Thursday as investors flocked to the safety of government debt and the odds of a U.S. recession appeared to rise.

The Atlanta Fed on Thursday lowered its second-quarter GDP estimate to minus 1%, from +0.3% on Monday. The latest estimate comes after first-quarter GDP fell at an annual rate of 1.6% in a revised reading.

What happened
  • The 2-year Treasury yield TMUBMUSD02Y,
    fell 12.8 basis points to 2.925% against 3.053% on Wednesday afternoon. Yields move in the opposite direction to prices.

  • The 10-year Treasury yield TMUBMUSD10Y,
    fell 11.8 basis points to 2.973% from around 3.09% in the prior session.

  • The 30-year Treasury yield TMUBMUSD30Y,
    fell 9.1 basis points to 3.121% from 3.212% on Wednesday.

  • These are the lowest levels for 2-, 10- and 30-year rates in three weeks, based on 3 p.m. data, according to Dow Jones Market Data.

What drives the markets?

Yields fell sharply on Thursday as concerns over economic growth sparked a global selloff in risky assets and encouraged investors to seek refuge in the safety of government bonds. Meanwhile, the latest US inflation reading did little to calm nerves as it contained little indication that price gains would diminish as quickly as many believed.

Data on Thursday showed the Fed’s preferred gauge for US inflation rose 0.6% in May, tripling from 0.2% in April, largely due to rising costs gasoline and food. Furthermore, the headline inflation rate over the past year has remained unchanged at 6.3%.

Meanwhile, the narrower measure of the so-called Personal Consumption Price Index, which excludes food and energy, rose a relatively modest 0.3% for the fourth consecutive month; this was below Wall Street’s forecast of 0.4%. And the base rate for the 12 months ending in May slowed to 4.7% from 4.9% in April.

Other data released Thursday showed consumer spending slowed sharply in May as Americans grew more cautious due to inflation. Incomes rose just over 0.5% last month, but inflation continues to rise faster than wages and leaves most Americans in worse financial shape.

Initial weekly jobless claims fell slightly, dropping 2,000 to 231,000 for the week ending June 25.

Year-to-date, the benchmark 10-year Treasury yield is still up nearly 135 basis points, pushed higher by the Federal Reserve’s rate hikes in response to the surge in the inflation.

What analysts say

“The most notable development during the last full trading session of the week was the 10-year yields falling below 3% for the first time since June 10, as interest buying for closing the half lowered rates across the curve,” BMO Capital Markets said. strategists Ben Jeffery and Ian Lyngen.

“While this was the most eye-catching development, the belly of the curve performed the best, as 5-year rates also probed 3%, and the breakdown of price action resonates with the movement of the thresholds of profitability and the implications for the Fed,” they said in a note. “The lagged influence of monetary policy means that any tightening executed this year has little bearing on the inflation footprints made in 2022.”

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