Surging yields on US Treasuries crossed the 3% threshold amid a price rout on the government bonds (yields rise as prices fall) in Monday trading ahead of this week’s meeting of the Federal Open Market Committee, which determines Federal Reserve monetary policy.
Fed officials have telegraphed that they will raise the overnight federal funds rate by a half-percentage point this week after hiking it 0.25 points in March for the first time since December 2018.
Inflation that can fairly be described as runaway has rattled investors, who now worry about stagflation and even recession as they realize the Fed will have to ratchet up rates to try and catch up with rising prices. As a result, markets are pushing up yields.
The yield on the benchmark 10-year Treasury note rose above 3% on Monday for the first time since 2018, after the 30-year bond pushed above that threshold earlier in the day. However, the 10-year yield quickly fell back below that level.
This week's FOMC meeting is also expected to provide a timetable for the Fed to run off its $9 trillion bond portfolio, which will pull billions from the market. As the Fed stops reinvesting maturing principal in new bond purchases, that will also remove a steady prop to prices.
For what it’s worth, inflation-protected Treasuries have moved into positive territory for the first time since the onset of the pandemic, but with an implied average inflation of 2.8% over 10 years, these market instruments may be underestimating the actual duration and level of inflation.
Geopolitical Jitters Push European Benchmarks To Unseen Levels
In Europe, yields on Germany’s benchmark 10-year bond continued to flirt with the 1% level last seen in 2014. The 10-year yield settled at 0.9640% on Monday.
The European Central Bank has been dragging its feet on monetary tightening, but German officials are getting worried as the country’s inflation hit 7.4% in April.
Sharp increases in energy prices are driving the inflation, due in great part to the Ukraine war and disruptions in Russia’s supply of oil and gas.
France’s 10-year bond yield has also risen to levels not seen since 2014, nudging 1.5% as the country approaches contentious legislative elections next month.
French President Emmanuel Macron was comfortably re-elected to a second five-year term last month, but he faces a more difficult challenge in sustaining his majority in parliament.
Far-left politician Jean-Luc Mélenchon is trying to cobble together a leftist alliance to deny Macron the ability to push through his agenda and Monday announced a pact with the Greens for a united front that may also include the Communist and Socialist parties.
Meanwhile, Greece is trying to move past its junk-bond status and last week floated a €1.5 billion bond with a 2.4% coupon that was oversubscribed more than three times.
The bond, a new tranche of a 2020 seven-year bond, was not aimed at raising money because Athens has ample funds. Rather, it was designed to build trust with investors as the country hopes for investment-grade status next year.
Standard & Poor’s upgraded Greece to BB+ from BB the week before, bringing it to the threshold of a BBB investment-grade rating.