US government bonds showed signs of stabilizing on Friday, pushing yields lower a day after a chaotic session had triggered them.
The yield on the benchmark 10-year Treasury bond stood at 1.459%, according to Tradeweb, down from 1.513% at the end of Thursday. The 10-year yield rose more than 0.3% in February, representing the largest increase in a month since November 2016.
Yields, which rise when bond prices fall, rose sharply on Thursday as a week-long sell off intensified, fueled by bets that the Federal Reserve will start raising interest rates earlier than expected in response to what investors expect to be a burst of economic growth and inflation later this year.
The 10-year yield posted its biggest one-day gain since Nov. 9 during Thursday’s session to finish at its highest closing level in a year. The five-year yield, which is most sensitive to the short-term outlook for interest rates, saw its biggest one-day gain in more than 10 years.
However, higher yields helped investors regain appetite for Treasuries on Friday. Demand was also boosted by this being the last trading session of the month, when many fund managers buy Treasuries to match adjustments in their benchmark bond indices.
While many investors expected the 10-year yield to rise in 2021, the jump to 1.5% from around 1% in a matter of weeks raises some concerns. While Fed officials have said the performance escalation toward pre-pandemic levels marks a return to normalcy, some investors are concerned that their lack of concern could drive more sales.
“Thursday’s rate movement shows some signs of the dysfunction that fueled the Fed’s action in March ”Bank of America analysts wrote in a note Friday. “However, the Fed will face the challenge of backing down aggressively on the move, as they have so far described it as a reflection of ‘healthy’ factors.”
After falling overnight, yields rose early Friday after the Commerce Department released new data showing US household incomes rose 10% in January and consumer spending rose 2.4%. , which suggests that the economy is poised for a burst of growth this year.
Investors tend to sell Treasuries when they expect faster growth and inflation, which reduces the value of fixed payments on the bonds and can lead the Fed to raise interest rates. His optimism has been lifted recently thanks to improving economic data, the promise of more public spending and the expansion of the distribution of coronavirus vaccines.
Yield declines on Friday were led by longer-term bonds, and the 30-year bond yield fell to 2.187% from 2.303% on Thursday.
Despite the general selling pressure, the gap between shorter and longer-term returns has been narrowing in recent sessions after expanding steadily earlier in the year. In addition to noticing a shift in expectations about the timing of the Fed’s rate hikes, some analysts said the gap between short-term and long-term yields had simply become too large and needed to be corrected.
The gap, or spread, between yields on 5- and 30-year Treasuries ended Friday at 1,412 percentage points, down from 1,504 on Thursday and the narrowest spread in nearly a month.
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8