US yields soften after vaulting to one-year highs; sentiment wary

US Treasury yields subsided in cautious trading on Friday as investors repositioned, but worries about rising inflation weighed on sentiment as data showed a strong rebound in consumer spending.

The benchmark 10-year US Treasury note's yield was down 5.2 basis points at 1.4633%. On Thursday it touched 1.614%, the highest in a year, rocking world markets. The note's yield is still up more than 50 basis points so far this year. Yields in other major government bonds have also increased.

Raymond James market analyst Ellis Phifer said Friday's trading showed investors turning cautious and repositioning after Thursday's jump. "We moved vertical in rates and there's a point where things get overdone," he said.

Part of Friday's decline could also reflect dealers convincing clients to buy bonds after poor demand for a 7-year note auction on Thursday, he added.

US consumer spending, which accounts for more than two-thirds of US economic activity, jumped 2.4% last month after decreasing 0.4% in December, the Commerce Department said on Friday, setting up the economy for faster growth in the first quarter.

A closely-watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 132 basis points, about 2 basis points lower than Thursday's close. On Thursday, the gap touched 141 basis points, the most since 2015.

The US secured overnight financing rate (SOFR), which measures the cost of borrowing cash overnight using Treasury securities as collateral, was at 0.03% after dropping to 0.01% Wednesday, the lowest since May 2020. SOFR has replaced the London interbank offered rate (LIBOR) as an interest rate benchmark for banks.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 1.9 basis points at 0.1466% on Friday.

The yield on 30-year Treasury Inflation Protected Securities was at 0.171%. The 10-year TIPS yield was at -0.640% and the breakeven inflation rate was at 2.1%.