Treasury yields dropped on Friday as concerns about a possible Russian invasion of Ukraine dented risk appetite and boosted demand for safe haven bonds. Stocks and bond yields fell after Russian-backed separatists in eastern Ukraine said on Friday they planned to evacuate their breakaway region’s residents to Russia.
“That makes it a little more real and more of a possibility that there’s going to be a conflict,” said Lou Brien, market strategist at DRW Trading in Chicago, adding that “stocks have reacted to that, and bonds have reacted to stocks.”
Benchmark 10-year yields fell four basis points to 1.930%, the lowest since Monday. The yields hit a two-and-a-half-year high of 2.065% on Wednesday before the Federal Reserve released minutes from its January meeting, which had no new information regarding the US central bank’s plans to raise rates and shrink its balance sheet.
Fed officials agreed that, with inflation tightening its grip on the economy and employment strong, it was time to raise interest rates, but also that any decisions would depend on a meeting-by-meeting analysis of inflation and other data.
New York Fed President John Williams said Friday there is little need for the Fed to kick off its interest rate hiking cycle with a big move, advocating instead for the central bank to raise rates “steadily” and adjust the pace if needed.
An interest rate hike of at least 25 basis points at the Fed’s March meeting is fully priced into the market, though the odds of a 50 basis point hike have declined over the past two days, and fell further after Williams comments. Fed fund futures traders are now pricing in only a 25% chance of a 50 bp rate increase next month.
The yield curve between two-year and 10-year notes flattened to 45 basis points, after reaching 54 basis points on Thursday. The curve has steepened since reaching 38 basis points on Monday, which was the smallest yield gap since July 2020.
New supply of short and intermediate-dated debt next week could put renewed upward pressure on yields of these maturities, and place additional flattening pressure on the curve.
The Treasury will sell $155 billion in coupon-bearing supply, including $52 billion in two-year notes on Tuesday, $53 billion in five-year notes on Wednesday and $50 billion in seven-year notes on Thursday.
Data on Friday showed that US home sales unexpectedly increased in January, but investors paying in cash are squeezing out first-time buyers from the housing market amid record low inventory and higher prices.
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