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Bond Report: Benchmark 10-year Treasury yield climbs to highest since 2018 as investors price in possible half-point rate hike by Fed in May

Treasury yields moved higher Thursday as investors assessed the path for inflation and one Federal Reserve policy maker gave further credence to a larger-than-normal, half percentage point interest rate hike in May.

Two- to 30-year yields rose by more than 10 basis points each, while the spread between 2- and 10-year yields steepened to 37 basis points.

What are yields doing?

The yield on the 10-year Treasury note

climbed to 2.818%, compared with 2.688% at 3 p.m. Eastern on Wednesday

The 2-year Treasury yield

was 2.451% versus 2.34% on Wednesday afternoon.

The yield on the 30-year Treasury bond

stood at 2.925%, up from 2.795% late Wednesday.

Market drivers

In an interview with Bloomberg Television, New York Federal Reserve President John Williams said on Thursday that a half-point hike in May is a “reasonable option” for U.S. central bankers. He also said the Fed needs to raise its benchmark interest rate “expeditiously” to get inflation under control.

Earlier this week, government data showed that inflation continued to accelerate in March, with the consumer price index showing its fastest annual rise since 1981. A slower rise in the monthly core rate of inflation — excluding food and energy — has prompted some investors and economists to conclude inflation may have peaked.

Data released on Thursday showed that U.S. retail sales rose a mild 0.5% in March, but high gasoline prices and inflation are taking a toll on U.S. households. Initial jobless benefit claims rose 18,000 to 185,000 for the week ended April 9. And the University of Michigan’s gauge of consumer sentiment rebounded in April to 65.7 from March’s reading of 59.4, with Americans anticipating gasoline prices will remain steady over the next year.

Meanwhile, former U.S. Treasury Secretary Larry Summers told Bloomberg Economics that a recession is “the most likely thing” for the country, partly because the Federal Reserve “is going to have to keep going until we see disinflation.”

Elsewhere the European Central Bank affirmed expectations that it will end net asset buys under its Asset Purchase Program in the third quarter, and said any change in interest rates would come “some time after” it ends purchases. For the current quarter, the ECB said it was sticking to a plan to buy €40 billion in April, €30 billion in May and €20 billion in June, while the pace of any purchases in the third quarter would be “data dependent.”

What analysts say

“An analysis of the behavior of the yield of 10-year U.S. Treasurys during the eight major Fed tightening cycles since the 1970s suggests to us that the current selloff in long-dated U.S. government bonds may have further to run if the Fed hikes rates by a further 300bp over the coming year, as we expect,” said Franziska Palmas, a markets economist at Capital Economics. “This underpins our forecast for the 10-year Treasury yield to rise to a peak of 3.75% by the middle of 2023,” Palmas wrote in a note.

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