10 and 30-year U.S. Treasury yields extend dip to 2-week low

U.S. government bond yields slipped further on Tuesday, extending their decline to around two-week lows.

How Treasurys are performing

The 10-year Treasury note TMUBMUSD10Y, 1.567% was yielding 1.594%, down 1.4 basis points from Monday’s level at 3 p.m. Eastern Time.
The 30-year Treasury bond rate TMUBMUSD30Y, 2.265% was at 2.294%, off 0.8 basis point.
The 2-year Treasury note TMUBMUSD02Y, 0.149% was yielding 0.149%, compared with 0.151% on Monday.

On Monday, the 10-year and 30-year bonds touched their lowest yields since May 10 and May 7, respectively, according to Dow Jones Market Data.

What’s driving the market?

The retrenchment in long-term yields to their lowest levels since around early May was attributed by some fixed-income analysts to recent reassurances by Federal Reserve officials that they will maintain their low interest rate and $120 billion per month bond buying program for some time despite a rise in inflation as the U.S. economy recovers from the coronavirus pandemic.

Fed Gov. Lael Brainard and Atlanta Fed President Raphael Bostic have been describing inflation as likely to be transitory and unconcerning if it does ratchet higher.

“If we did see inflation persistently and materially move above our goals in a matter that threatened longer term inflation expectations, we have the tools to gently guide inflation back toward our target,” wrote Brainard in a May 11 speech.

However, late Monday, Kansas City Fed President Esther George said that policy makers must be “flexible” and “nimble,” in adjusting policy as the economy rebounds from COVID. She emphasized that the Fed needs to be alert to the possibility of sustained pricing pressures derived from the snapback from the pandemic.

“While it is clear that temporary factors are boosting inflation now, I am not inclined to dismiss today’s pricing signals,” George said, in a speech at her district bank’s agricultural symposium.

St. Louis Fed President James Bullard on Monday echoed that view, adding that the central bank was taking financial instability on board as a “potential risk” for the U.S. economy, in comments to Yahoo Finance.

Looking ahead, Fed Vice Chair for Supervision Randal Quarles is due to speak before the U.S. Senate Committee on Banking at 10 a.m. Eastern Time.

On the economic front, the March S&P/Case-Shiller U.S. home price index is due at 9 a.m. ET, a report on U.S. new home sales for April is due at 10 a.m., and a report on consumer confidence is due at the same time.

Market participants are also facing an auction of $60 billion in 2-year notes at 1 p.m., which could gauge appetite for short-dated debt.

What fixed-income traders and strategists say

“With all the talk of inflation, it would be logical to ask: if the market truly felt longer term inflation was an issue, would 10-year yields sit at 1.59% and be trending toward the lower end of its recent range (1.48% last employment number)?” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities, in a research note.

“True, the Fed continues to buy in clips to the tune of $120 billion per moths. But certainly the Fed was buying when markets repriced in the first quarter of 2021. Don’t get us wrong, the moves lower in yield have been a grind versus the price action when moving higher. But Treasury yields are far more exposed than to just domestic circumstances,” Faranello wrote.

By: Mark DeCambre