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Bond Report: 2- and 10-year Treasury yields see biggest weekly gain in years as investors reassess Russia-Ukraine war developments

Yields on 2- and 10-year Treasury notes climbed to their highest daily levels in almost three years on Friday, while posting their biggest weekly gains in years, as investors reacted to Russia’s possible reassessment of its ambitions in the monthlong war in Ukraine war.

Friday’s aggressive selloff in U.S. government debt pushed yields higher across the board. Meanwhile, the spread between 5- and 30-year rates shrank below 3 basis points and teetered on the brink of inverting for the first time since March 2006.

What are yields doing?

The yield on the 10-year Treasury note

advanced 15.1 basis points to 2.491% from 2.34% at 3 p.m. Eastern on Thursday. It rose 34.5 basis points this week, its biggest one-week gain since the period that ended Sept. 13, 2019, according to Dow Jones Market Data. Yields and debt prices move opposite each other.

The 2-year Treasury note yield

rose 17.7 basis points to 2.299% from 2.122% Thursday afternoon. For the week, it was up 34.4 basis points, its biggest weekly gain since the period that ended June 5, 2009.

Both the 2- and 10-year yields reached their highest daily levels since May 6, 2019, based on 3 p.m. data.

The yield on the 30-year Treasury bond

rose 9.3 basis points to 2.603% from 2.51% late Thursday. That’s its highest daily level since July 25, 2019. The yield is up 45.5 basis points over the last three weeks, its largest three-week gain since the period that ended Feb. 20, 2015.

What’s driving the market?

Treasurys aggressively sold off on Friday as investors assessed reports that Russia might settle for less than total control of Ukraine, analysts said. Prior to Friday’s market action, government bonds were already on track for their worst year since 1949.

Read: Government bonds on track for worst year since the Marshall Plan was enacted

The headlines on Ukraine triggered “traditional risk-on moves that contributed to the selloff” in Treasurys Friday morning, BMO Capital Markets strategist Ben Jeffery said via phone.

Meanwhile, expectations that the Federal Reserve will raise interest rates by 50 basis points, or half a percentage point, at its next policy meeting in May have grown this week. Fed funds futures now reflect an almost 73% probability of a half-point rate increase in May, according to CME’s FedWatch tool. That’s up from 43.9% a week ago and 33% a month ago. The market also reflects a 27% probability of a quarter-point increase.

Fed Chairman Jerome Powell left the door open to a move larger than a quarter point in remarks Monday, a prospect echoed by other policy makers this week. On Friday, New York Fed President John Williams said there was nothing wrong with 50 basis point interest rate hikes in theory and he would support them if appropriate. But he stopped short of talking about the Fed’s next meeting in May.

The University of Michigan’s final consumer sentiment index reading for March came in at 59.4 versus an initial 59.7, remaining at an almost 11-year low. Pending home sales fell 4.1% in February.

What are analysts saying?

The possibility that the Russian army will focus on securing the eastern Donbas region of Ukraine — instead of the entire country — “sent global 5-yr government prices into free fall,” said Jim Vogel, executive vice president at FHN Financial.

“With no comparable reaction in other markets in real time, the best `live’ interpretation of today’s move is traders view anything that relieves crushing bombardment on Ukraine [as] a step toward less economic risk,” Vogel wrote in a note. Less economic risk from Ukraine would leave the Fed and European Central Bank “free to raise rates based solely on the need to fight inflation.”

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