NEW YORK: Long-dated US Treasury yields tumbled on Friday as concerns about new lockdowns related to the spread of COVID-19 in Europe increased demand for safe-haven bonds, though the move was likely exaggerated by low liquidity. Two-year yields jumped, meanwhile, after Federal Reserve Vice Chair Richard Clarida took a hawkish tone in a speech and acknowledged that there is an upside risk to inflation.

Germany’s health minister said a lockdown including vaccinated people could not be ruled out. Austria said it will reimpose a full lockdown next week and require its entire population to be vaccinated as of February. The European response has raised some concerns that new lockdowns could also happen in the United States if there is a dramatic rise in cases, which would hurt the economy.

“Even though Europe has been more aggressive than the US in terms of heavy-handed government responses to COVID, there is always chatter about how we could see the same sort of stuff happening over here if cases were to increase significantly,” said Tom Simons, a money market economist at Jefferies in New York, though he added that “I don’t think those fears are necessarily justified.” The size of the reaction, which sent 10-year yields down as much as nine basis points, also indicates impaired market liquidity that analysts say is in part because hedge funds burned by volatile moves in October and November have pulled back from the market.

“The hedge fund community is not in there in the same way that they normally are and that could be creating a little more of an illiquid market and a little bit more rate movement than normally we would otherwise see,” said Simons. Benchmark 10-year notes last yielded 1.538%, down five basis points on the day, after dropping as low as 1.515%. the lowest since Nov. 10.

Many investors were caught offside in October as a rapid rise in inflation led traders to reprice for the possibility that the Fed may need to raise rates as soon as mid-2022 to stem price pressures.