US yields edge up after safe-haven bids stops


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NEW YORK – Yields on US Treasuries edged higher on Tuesday as US President Joe Biden announced new sanctions on Russia in retaliation for Moscow recognizing two breakaway regions of Ukraine, but the bond market reaction was muted overall.

The US measures, which target Russian banks and sovereign debt, were put in place after Russian President Vladimir Putin authorized sending what he called peacekeeping troops to the separatist areas.

The bond market is more concerned about rising inflation and an expected tightening of monetary policy by the Federal Reserve and other central banks than Ukraine at the moment, said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco.

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“I don’t think the front end is garnering any sort of safe haven bid, either on the Ukraine fears or the meltdown in equities,” Rupert said.

The sell-off in Treasuries is more “a fear of central bank normalization and a potential central bank mistake driving us into a recession down the road,” Rupert said.

The yield on 10-year US Treasury notes rose 0.4 basis points to 1.934%, after an early morning price jump sent yields below 1.85% at one point. Yields move in the opposite direction of bond prices.

The Treasury market reversed course after the earlier safe-haven bids as investors took a more cautious approach with inflation and central bank policy front and center.

The closely watched yield curve measured the gap between yields on two- and 10-year Treasury notes, seen as an economic indicator, flattened further and was last at 39.1 basis points – signaling a potential slowdown ahead.

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Any flight to quality that was seen overnight has ceased with the market seeing such an extreme situation as probably a selling opportunity, said Tom di Galoma, managing director at Seaport Global Holdings.

Halfway through the Asian session rates rose on the notion that stocks had oversold on the Ukraine news, he said.

The US Treasury sold $ 52 billion of two-year notes at auction to yield 1,553%. The two-year yield, which typically moves in step with interest rate expectations, was up 6.9 basis points at 1.541% after the morning rally.

The auction was good but primary dealers bought just 15.6% of the notes offered, less than half of what they had purchased in recent sales and the lowest in many years, if not ever, said Lou Brien, market strategist at DRW Trading, in a note.

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How Russia’s foray into Ukraine will play out is unclear but markets believe in the economic recovery’s strength and inflation’s hot hand, said Jim Vogel, interest rate strategist at FTN Financial.

“This morning demonstrates how difficult it is to mount a bond rally in the face of increasing uncertainty around the climate for risk assets,” Vogel said.

Markets see rates heading higher, with the Fed expected to move in March.

Money markets are pricing in just a 36.5% probability of a 50-bps rate hike next month, down recently from around 60%.

Inflationary pressures were seen in data that showed US business activity regained speed in February as the drag from the winter surge in COVID-19 infections ebbed, but higher prices for inputs remained a burden amid lingering supply constraints.

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IHS Markit’s flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, rebounded to a reading of 56.0 this month from 51.1 in January.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) traded at 2.864%, after closing at 2.83% last Friday.

The 10-year TIPS breakeven rate was last at 2.471%, indicating the market sees inflation averaging about 2.5% a year for the next decade.

The US dollar five-years forward inflation-linked swap, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2,308%. (Reporting by Herbert Lash Editing by Chizu Nomiyama, Lisa Shumaker and Tim Ahmann)

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