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Bond Report: U.S. Treasury yields climb as reflation fears unnerve bond traders

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U.S. Treasury yields traded higher on Friday as investors digested a raft of data pointing to the struggles of the consumer at the start of the year, even as bond traders were unsettled by the potential for the Biden administration’s $1.9 trillion fiscal stimulus and pent-up household spending to course through the economy in the months ahead, releasing inflationary pressures.

What are Treasurys doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.672%

climbed 5.4 basis points to 1.668%, while the 2-year Treasury yield
TMUBMUSD02Y,
0.140%

was flat at 0.141%, The 30-year Treasury rate
TMUBMUSD30Y,
2.373%

was at 2.380%, up 4.7 basis points from yesterday.

What’s driving Treasurys?

Fears about inflation continued to dominate the thoughts of bond traders, with U.S. Treasury yields climbing overnight.

Investors also noted the tepid demand for a batch of 7-year notes auctioned by the U.S. Treasury on Thursday afternoon, underlining the uncertainty around the capacity of investors to soak up fresh debt issuance in the face of increased bond-market volatility.

In U.S. economic data, consumer spending dropped 1% last month, while personal income fell 7.1% in February. Personal consumption expenditures, the Fed’s favored inflation gauge rose 0.2% in February.

The Federal Reserve plans to “gradually roll back” its $120 billion-a-month bond purchase, but only once the U.S. economy has more fully healed from the pandemic, according to Fed Chairman Jerome Powell in an interview on Thursday.

See: Powell says Fed will ‘gradually’ cut its bond-market footprint — some think this year

What did market participants say?

“The overnight weakness in U.S. rates speaks to the ongoing debate regarding the sustainability of reflationary expectations in the present environment,” said Ian Lyngen, head of U.S. rates at BMO Capital Markets.

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