NEW YORK: US Treasury yields fell on Friday, with the benchmark 10-year yield dipping back below 2% as concerns over a possible invasion of Ukraine by Russia dented risk appetite. Yields were slightly lower earlier in the day as markets took stock of the previous day’s sharp move higher on a strong inflation reading and after comments by a US Federal Reserve official raised expectations of an aggressive tightening policy.
The downward move in yields on Friday accelerated after a report said the United States believed Russian President Vladimir Putin had decided to invade Ukraine.
White House national security adviser Jake Sullivan said Russia now has sufficient forces to conduct a major military operation against its neighbor and that an assault could begin “any day now,” but the US did not believe Putin had yet made a decision.
The yield on 10-year Treasury notes was down 8 basis points to 1.949% on Friday. The 10-year yield was on track for its biggest daily decline in just over two months, but was still on pace for a weekly gain, which would mark its third straight week of gains.
“We just have to see how this plays out over the weekend and whether or not international leadership can bring this under wraps,” said Thomas Hayes, managing member at Great Hill Capital LLC in New York.
“Because if not, then the knock-on effects could be material, and that’s what the market is worried about.”
The benchmark 10-year US Treasury note yield rose nearly 10 basis points on Thursday, after an inflation gauge showed its highest annual reading in 40 years and St. Louis Federal Reserve President James Bullard said he had become “dramatically” more hawkish in light of the data.
Bullard also called for a full percentage point of interest rate hikes over the next three meetings.
While financial markets are fully pricing in a rate hike of at least 25 basis points from the Fed at its March 15-16 policy meeting, expectations for a 50-basis-point hike has dropped to 56% from 93.8% on Thursday, according to CME Group’s FedWatch Tool.
Goldman Sachs upped its view on the path of interest rate hikes from the Fed, saying it expects seven 25-basis-point hikes this year. HSBC US economist Ryan Wang said the bank now expects the Fed to front-load rate increases more than previously anticipated, with a 50-basis-point hike in March and four additional quarter-point rate raises in 2022.
The University of Michigan said its preliminary consumer sentiment index dropped to 61.7 in the first half of this month, the lowest since 2011, from a final reading of 67.2 in January, with the survey’s one-year inflation expectations rising to 5%, the highest since 2008, although the five-to-10-year inflation outlook held at 3.1%.
Yields briefly moved higher after the data, with the 10-year touching 2.063%, its highest level since July 31, 2019.
The yield on the 30-year Treasury bond was down 4.3 basis points to 2.259% after reaching 2.353%, its highest since May 20.
A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 43.8 basis points after flattening to as little as 39.09, the smallest gap since Aug. 7.
The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 5 basis points at 1.510% after surging more than 24 basis points on Thursday, its biggest daily jump since June 5, 2009.
The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.781%, after closing at 2.754% on Thursday.
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