Bond Report: 2-year Treasury yield posts biggest quarterly gain in almost 38 years as Fed’s favorite inflation gauge rises sharply

What are yields doing?

The 2-year Treasury note yield BX:TMUBMUSD02Y fell 4.2 basis points to 2.284% versus 2.326% Wednesday afternoon. It gained 155.4 basis points in the first quarter, the biggest quarterly gain since June 1984, based on 3 p.m. levels, according to Dow Jones Market Data.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.325%
dropped 3.3 basis points to 2.324% from 2.357% at 3 p.m. Eastern on Wednesday. During the quarter, it advanced 82.8 basis points, the biggest quarterly gain since March 2021. 

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.437%
fell 3.5 basis points to 2.444% from 2.479% late Wednesday. It rose 55.6 basis points over the quarter, also the biggest quarterly gain since March 2021.

What’s driving the market?

In U.S. economic data Thursday, the Federal Reserve’s favorite inflation calculator rose 0.6% in February, while the increase over the past year stayed at a 40-year high. The so-called personal consumption price index climbed to 6.4% in the 12 months that ended in February, the government said. That’s the steepest increase since January 1982.

The combination of high inflation, tight labor markets, and uncertain expectations is raising the prospect of a 1970’s-type wage-price spiral, hedge-fund giant Brevan Howard warned, according to Bloomberg.

The yield curve teetered on the brink of inversion again on Thursday, two days after the spread between 10-year and 2-year notes briefly fell below zero. A sustained inversion of that area of the curve is seen as a reliable indicator of recession albeit with a lag of up to two years.

See: What stock-market investors need to know about the bond market’s recession signal

Despite Thursday’s pullback, Treasury yields are up sharply in the first three months of 2022 as inflation accelerated to a nearly 40-year high and the Federal Reserve signaled it would be much more aggressive in raising interest rates and otherwise tightening monetary policy in an effort to get a grip on soaring prices.

Read: U.S. government bonds are having one of their worst quarters since the U.S. Civil War

Meanwhile, oil futures
CL.1,
-6.10%
CL00,
-6.10%,
which had surged to around 14-year highs in early March in reaction to Russia’s invasion of Ukraine, fell sharply Thursday. The declines came after President Joe Biden authorized the release of 1 million barrels of oil a day from the nation’s strategic petroleum reserve.

U.S. consumer spending rose a mild 0.2% in February, but rising prices due to high inflation played a big role and are weighing on the economy. Meanwhile, incomes rose 0.5% in February. That compares to forecasts for a 0.5% increase in each reading.

U.S. jobless claims rose, reversing some of last week’s big drop. Initial jobless claims rose by 14,000 to 202,000 in the week ended March 26, the Labor Department said Thursday. Economists polled by The Wall Street Journal had estimated new claims would rise to 195,000.

What are analysts saying?

Analysts at UniCredit said they see increasing signs the yield on the 10-year U.S. Treasury note, as well as the yield on the 10-year German government bond
TMBMKDE-10Y,
0.548%,
known as the bund, have “peaked for the time being.”

“In money markets, eight additional rate hikes by the Fed are priced in for the current year, and the peak level of the fed funds target rate is seen at close to 3.00% by the middle of next year,” they wrote. “It is currently barely conceivable that investors would position for an even steeper and/or longer rate-hike cycle.”