NEW YORK: US Treasury yields rose in line with those of European government bonds on Thursday, with two-year yields hitting their highest in three years, after hawkish comments from an ECB official and as investors prepare for aggressive Federal Reserve rate hikes.
Germany’s two-year bond yield shot up to an eight-year high after European Central Bank vice-president Luis de Guindos backed the end of bond purchases in July, raising prospects of a rate hike soon.
It comes as US yields have marched to three-year highs on expectations the US central bank will aggressively hike interest rates as inflation rises at its fastest pace in 40 years.
“The market is really starting to price in a much more aggressive path of rate hikes for the next upcoming meetings,” said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.
The Fed is expected to hike rates by 50 basis points at each of its next three meetings, and will likely announce plans to reduce it’s $9 trillion balance sheet at its May 3-4 meeting.
Fed funds futures traders are pricing for the central bank’s benchmark rate to rise to 1.80% in July, and to 2.84% next February, from 0.33% now.
Fed Chair Jerome Powell will speak later on Thursday.
Ten-year Treasury yields were last 2.882%. They reached a high of 2.981% on Wednesday, the highest since Dec. 2018. Two-year yields, which are highly sensitive to interest rates, reached 2.674% on Thursday, also the highest since Dec. 2018, before dipping back to 2.661%.
The yield curve between two-year and 10-year notes flattened 4 basis points to 21 basis points. This part of the yield curve briefly inverted late March/early April, which has historically been a reliable indicator that a recession is likely in one-to-two years.
Yields on 10-year Treasury Inflation-Protected Securities (TIPS) were at minus 8 basis points. The yields briefly turned positive on Tuesday and Wednesday, meaning that an investor would break even on the notes in 10 years, after accounting for expected inflation.
If real yields keep rising it could weigh on appetite for riskier assets including stocks and add to concerns that the Fed’s tightening will result in an economic downturn.
“This is a pretty meaningful paradigm shift...in the market pricing of rate hikes,” said Rajappa, noting that the question is “what happens to the trajectory for growth under those circumstances.”
The US Treasury Department will sell $20 billion in five-year TIPS on Thursday.
Data on Thursday showed that the number of Americans filing new claims for unemployment benefits fell moderately last week, still suggesting that April was another month of strong job growth.
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