SHANGHAI: US yields on the shorter end of the curve edged up to 2-1/2-year highs on Monday, ahead of a Federal Reserve policy meeting this week, and as the Russia-Ukraine conflict threatens to accelerate inflation.
The Fed is widely expected to raise interest rates by a quarter of a percentage point at this week’s meeting. On Monday, the rate-sensitive US 2-year yield climbed to 1.809%, equalling a high on Sept. 16, 2019.
Last week, bearish bets on US Treasury 10-year note futures hit their highest since February 2020 as US Treasuries suffered one of their worst weeks since the global financial crisis.
“We expect a 25bp hike, in line with the market pricing, however risk rewards remain skewed toward higher bond yields as they will need to ‘talk tough’ on inflation,” analysts at Westpac said in a note.
“So we expect 10yr yields to continue their push back above 2%, with 2.25% remaining the objective over coming weeks.”
US consumer sentiment fell more than expected in early March as gasoline prices surged to a record high in the aftermath of Russia’s war against Ukraine, boosting one-year inflation expectations to the highest since 1981.
On Monday, the 10-year yield touched a high of 2.06%, its firmest since Feb. 16.
Federal Reserve Chairman Jerome Powell last week flagged multiple interest rate increases this year, citing the economy’s strong labour market and persistently high inflation.
“We expect the Fed to project that they’ll do what is needed to meet their mandates even in the context of the geopolitical uncertainties, but that the geopolitical developments could in fact reinforce upside inflation risks,” Citi analyst Ebrahim Rahbari said in a note.
The US dollar 5-year forward inflation-linked swap , watched as gauge of inflation expectations, was last at 2.746%, not far off a nearly 7-1/2-year high touched last week.