US Treasury yields stabilize – WSJ

Yields, which are rising as bond prices fall, rose sharply on Thursday as the one-week sell-off intensified – fueled by bets that the Federal Reserve will start raising interest rates earlier than expected in response to Investors expect an explosion of growth and inflation by the end of this year.

The 10-year yield was the biggest one-day gain since November 9, during Thursday’s session, to end at the highest closing level in a year. The five-year yield, which is more sensitive to the short-term outlook for interest rates, has seen the biggest one-day gain in 10 years.

Higher yields, however, helped investors regain their appetite for Treasurys on Friday. Demand was also boosted by the fact that it was the last trading session of the month, when many fund managers buy Treasurys to match adjustments in their benchmark bond indices.

While many investors expected the 10-year yield to rise in 2021, the jump to 1.5% from about 1% in a few weeks raises some concerns. While Fed officials said rising yields to pre-pandemic levels mark a return to normalcy, some investors worry that their lack of concern could boost more sales.

“Thursday’s rate hike shows some signs of the dysfunction that led to Fed action in March [2020]Bank of America analysts wrote in a note Friday. “However, the Fed will be challenged to push back aggressively in the move because, so far, they have described it as reflecting ‘healthy’ factors.”

After falling overnight, yields rose early Friday, after the Commerce Department released new data showing that U.S. household incomes rose 10 percent in January and consumer spending rose 2.4 percent, suggesting that the economy is poised for an explosion of growth this year.

Investors tend to sell treasuries when faster growth and inflation are expected, which reduces the value of fixed bond payments and may cause the Fed to raise interest rates. Their optimism was recently raised by improving economic data, promising to spend more on the government and expanding the distribution of coronavirus vaccines.

The decline in yield on Friday was driven by longer-term bonds, and the yield on the 30-year bond fell to 2.187% from 2.303% on Thursday.

Despite the general selling pressure, the gap between short-term and long-term returns has narrowed in recent sessions, after widening steadily at the beginning of the year. Observing a change in expectations regarding the timing of the Fed rate hike, some analysts said that the gap between short-term and long-term yields has simply become too large and needs to be corrected.

The difference, or spread, between 5- and 30-year Treasury yields ended Friday at 1,412 percentage points, down from 1,504 on Thursday and the narrowest spread in nearly a month.

Write to Sebastian Pellejero at [email protected] and Sam Goldfarb at [email protected]