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Post: Bond Report: 2 and 10-year Treasury yields hit one-week lows, ahead of start to Fed meeting

Yields for U.S. government bonds mostly pulled back to start the week Monday as global equities swooned—but then rebounded powerfully— and investors awaited an important two-day meeting of the Federal Reserve, the first of the young year, that is set to kick off on Tuesday.

Rising global tensions and heightened volatility in stocks domestically and abroad are likely anchoring yields lower.

What are yields doing?
  • The 10-year Treasury note yielded

    1.735%, down 1.2 basis points from 1.747% on Friday at 3 p.m. Eastern Time, marking its lowest yield since Jan. 13. Yields fall as prices for bonds rise.

  • The 2-year Treasury note rate

    was at 0.950%, off 4.3 basis points, versus 0.993% to end last week. The short-term not also saw its lowest yield since Jan. 13.

  • The 30-year Treasury bond
    known as the long bond, was yielding 2.083%, up 2.1 basis points from 2.062% on Friday.

What’s driving the market?

A strong afternoon auction of short-term debt, highlighted appetite for Treasurys, helping briefly nudge yields lower, but rates turned up again as the session progressed and stocks switched from losses to eventual gains, rebounding from the brink of an intraday collapse.

A $54 billion sale of two-year notes showed strong demand, with the so-called bid-to-cover ratio at 2.81 times, the highest since April 2020, well above the average bid-to-coverage ratio of 2.47 times, according to data compiled by Jefferies. The bid-to-cover ratio reflects demand from buyers compared with the amount of notes sold as a gauge of the success of the auction.

Above-average bidding is usually a sign of robust appetite for the debt.

The auction came as investors are bracing for Fed policy makers’ two-day meeting that ends Wednesday, which will likely be used to lay the groundwork for a shift away from an easy-money stance this year, without taking policy action.

While members of the rate-setting Federal Open Market Committee are likely to reaffirm investors’ expectations for an interest-rate increase in March, the first hike since December 2018, policy makers aren’t expected to tinker with policy rates, currently between 0% and 0.25%, for now or start shrinking their almost $8.9 trillion balance sheet until probably after June, following the end of their current bond buying program in March.

The FOMC, however, will set the tone for the coming months of prospective policy shifts, highlighting both the pace and intensity of tightening efforts to quell rising inflation pressures as global stocks buck lower.

Analysts at Goldman Sachs forecast four rate increases in 2022, but see a risk for more rate rises due to the surge in inflation. Market-based projections currently show that investors are also anticipating four rate increases this year.

Meanwhile, the world seems awash with risks that might also be drawing haven demand and undercutting appetite for assets considered risky such as stocks.

Over the weekend, the U.S. State Department ordered the families of U.S. personnel to leave Ukraine, as concerns grow about a potential Russian invasion, with the U.S. threatening sanctions if Moscow invades its neighbor. And the United Arab Emirates said it intercepted two ballistic missiles targeting its capital, Abu Dhabi, with Houthi rebels blamed for brewing conflict in the region.

SeeHow a Russian invasion of Ukraine could trigger market shock waves

Meanwhile, economic reports released Monday showed that U.S. economy slowed in January as the Omicron wave of the COVID-19 pandemic exacerbated supply delays and labor shortages. IHS Markit’s flash purchasing managers index for manufacturing fell to 55.0, a 15-month low, while the gauge for the services sector dropped to 50.9, an 18-month low.

Separately, shares of the sector’s largest $18.4 billion iShares iBoxx $ High Yield Corporate Bond ETF HYG fell 0.1% in a turbulent session Monday, adding to its 1.9% slide so far in January.

What strategists are saying
  • “Everyone is out with their Fed predictions, both in 2022 strategy pieces and ahead of the meeting this week. Most though are ‘all else equal’ analysis in response to the current high levels of inflation but we know historically there is always an equal and opposite reaction, for every action, as one of Newton’s laws say,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a Monday research note. “So bottom line and my 2 cent prediction, I think after ending [quantitative easing] and getting 50-75 bps of rate increases under their belt, the Fed will then see the economic and market reactions, and where the yield curve lies. Then, if the curve has flattened, they’ll start [quantitative tightening] in an attempt to steepen it. If the curve still steepens because the market doesn’t think they are tightening enough, they’ll do more hikes,” he wrote.

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