Bond Traders Refocus on 3% U.S. Yield as Inflation Bets Mount

• April 19 2018
• Liz McCormick, Elizabeth Stanton

A wave of selling across European sovereign debt and a rally in commodities prices are giving Treasury-market bears their mojo back.

A wave of selling across European sovereign debt and a rally in commodities prices are giving Treasury-market bears their mojo back.

The benchmark 10-year Treasury yield reached 2.93 percent Thursday, within about 2 basis points of the 2018 high touched in February. The slump in the world’s biggest bond market came as U.K. gilts slid along with German bunds amid a burst of supply out of Western Europe.

A rally in commodity prices to multiyear highs added to the pressure on government debt, weighing on longer-maturity Treasuries. The yield curve from 5 to 30 years steepened for the first time since April 5. While optimism over global growth was the driver for higher yields in February, this time it’s commodities, according to Weeden & Co.

The increase in Treasury yields “feels more like a momentum-based thing,” said Jay Mueller, senior portfolio manager at Wells Capital Management. While there’s concern about supply, “the best candidate is more worrisome inflation data, not only here but around the globe.”

The gap between 2- and 10-year Treasuries widened Thursday by about four basis points to 48 basis points. It narrowed to as little as 41 basis points Wednesday, the smallest differential in more than a decade.

The prospect that costlier commodities might stoke price pressures helped boost the outlook on inflation-linked debt. The breakeven rate signaled by 10-year inflation-linked Treasuries rose to 2.19 percent Thursday, the highest since 2014.

Gilts led the European bond slump as the prospect of supply coincided with the end of the latest round of Bank of England buybacks. The yield on 10-year U.K. debt surged about 10 basis points to 1.52 percent, while yields on similar-maturity German securities rose 7 basis points to 0.6 percent.

The tone may be poised to change when U.K. rates markets open Friday. The pound fell Thursday after BOE Governor Mark Carney hinted that a widely expected rate hike next month isn’t a done deal. The comments came out after gilts closed for the day.

— With assistance by Edward Bolingbroke, and Sarah Ponczek