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Bond Report: Treasury yields rise as commodity prices surge, reigniting inflation jitters

Yields for government debt were on the rise Tuesday as the recent surge in commodity prices helped feed already-elevated concerns about inflation, while reports of possible further fiscal stimulus in Europe to fund energy and defense spending resulting from the Ukraine war helped lift the stocks and the euro.

What are yields doing?

The 10-year Treasury note

yields 1.853%, up from 1,748% on Monday at 3 p.m. Eastern Time. Yields for debt move opposite to prices.

The 2-year Treasury note rate

stands at 1.621%, rising 7.5 basis points from 1.546% a day ago.

The spread between the 2-year and 10-year notes, known as the yield curve, stand at around 23.2 basis points. The yield curve is viewed as an accurate recession indicator.

The 30-year Treasury bond

yields 2.246%, compared with 2.149%.

What’s driving the market?

Commodity prices are surging and that has driven up expectations for inflation, which can chip away at the fixed value of debt, including its regular coupon payments.

Fears about the intensifying crisis in Ukraine have supported some safe-haven purchases for bonds versus stocks but rising prices in everything from crude oil

to dry goods and services have served to weigh on the appetite for Treasurys, even as worries about the health of the global economy rises.

A report on U.S. consumer prices on Thursday will provide fresh evidence of inflation, which could ripple through markets.

Meanwhile Bloomberg reported the European Union will announce a plan this week to jointly issue bonds to finance energy and defense spending. The region’s leaders meet on Thursday for a two-day summit which is expected to examine the proposal. The spread between German and Italian debt tightened following the news. The euro extended gains and stocks in the region reversed earlier losses. 

An auction of 3-year U.S. Treasury notes at 1 p.m. Eastern Time will also be closely watched.

Ahead of that investors will watch a report on U.S. trade due at 8:30 a.m. ET.

What strategists are saying

Inflation is running wild. The answer to higher prices is higher prices. It certainly feels that way. And the likelihood of a soft landing seems less and less likely,” writes Greg Faranello, head of U.S. rates at AmeriVet Securities in New York.

“If the overnight sell-off in government bonds holds through the morning, the 3-yr UST auction enjoys clear sailing,” wrote Jim Vogel, executive vice president at FHN Financial, in a Tuesday note.

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