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Bond Report: 10-year Treasury yield highest since June 2019 as investors monitor Russia-Ukraine war, await Fed meeting

Treasury yields jumped Monday, with the rate on the 10-year note at its highest since mid-2019, as investors assessed developments in the Russia-Ukraine war and awaited this week’s pivotal meeting of Federal Reserve policy makers.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.142%

was at 2.139% at 3 p.m. Eastern, up from 2.004% at the same time Friday. Monday’s level was the highest for the 10-year note since June 11, 2019, based on 3 p.m. levels, according to Dow Jones Market Data.

The 2-year Treasury yield
TMUBMUSD02Y,
1.867%

was 1.847% Monday afternoon, its highest since July 31, 2019, and, up from 1.748% on Friday.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.479%

rose to 2.474% compared with 2.363% late Friday.

What’s driving the market?

Treasury yields, which had fallen sharply in the wake of Russia’s Feb. 24 invasion of Ukraine as investors piled into government debt and other traditional havens, have taken back all ground lost and then some. Investor risk appetite appeared strong early Monday, with Dow industrials
DJIA,
+0.00%

and the S&P 500 Index
SPX,
-0.74%

opening higher, but equities eventually lost steam to end mostly lower.

Analysts said optimism over a fourth round of talks that were under way between Russian and Ukraine officials appeared to boost risk appetite despite a brutal weekend that saw Russian forces intensify their attacks on Ukrainian cities. A Russian airstrike on a Ukrainian military training center near Ukraine’s border with Poland, a NATO member, came after Moscow warned the West that it would consider arms deliveries to Ukraine as legitimate targets.

China, meanwhile, locked down the key southeastern manufacturing hub of Shenzhen as it also combats a COVID outbreak in the northeast of the country.

The Federal Reserve is expected to deliver a quarter-point increase to the fed-funds rate when it concludes a two-day policy meeting on Wednesday. Investors will be focused on clues to the pace and scope of future rate increases, as well as plans to shrink the Fed’s balance sheet.

The Fed was already set to deal with persistently high inflation. The Russian invasion complicates the picture, further stoking inflation as oil and other commodity prices soar, but also threatening economic growth as consumers get squeezed.

See: Fed to hike interest rates Wednesday, undeterred by lack of visibility on Russia-Ukraine war’s impact

What are analysts saying?

“Rates are on the move on a combination of hedging large corporate bond sales, anticipation of a meaningful shift in the Fed’s dot-plot, and, some optimism that Russia-Ukraine talks are gaining momentum, thereby causing an unwind of flight to safety,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors, in a note.

“What is notable is that the bond market is waking up to the possibility that the Fed and other central banks will return short term rates quicker to ‘neutral.’ While the concept is elusive, the neutral rate of interest has been estimated to be in the range of 1 to 2.5 percent for the G-10 central banks,” he wrote.

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