Short-term shaping for the biggest monthly sale in years
SINGAPORE (Reuters) – Two-year Treasuries appeared to close their worst month in more than three years on Friday, as the longer end of the curve was set to post its most violent flattening in a decade as traders brace for a Fed hike. rate around mid-2022.
Two-year yields rose 1.6 basis points (bps) to 0.5069% in Asia after hitting an almost 20-month high of 0.5670% on Thursday. They are up 22.5 basis points this month, the largest month-on-month increase since January 2018.
Long-term yields, on the other hand, have fallen because investors believe the spike in inflation will lead to earlier but lower rate hikes.
Yields, which fall when prices rise, were flat over the long end on Friday, although a slight drop in the 30-year yield to 2.005% kept it just below 20, a sign of the flattening of the l back of the curve. .
“The flattening of the bond curve suggests that bond market participants fear that a rapid tightening of monetary policy threatens global economic growth,” said Carol Kong, strategist at the Commonwealth Bank of Australia in Sydney.
The spread between 10-year and 30-year rates narrowed by more than 15bp this month, the sharpest contraction since 2011. Benchmark 10-year yields increased by around 2bp to 1.5996 % during the Asian session.
Next Friday, the final print of the Federal Reserve‘s preferred inflation measure is due at 12:30 GMT and is expected to show rising annual price growth.
On Thursday, market inflation indicators eased a bit. But they remain at high levels and when the Fed meets next week traders expect it to start cutting asset purchases.
Fed funds futures were counting on a roughly 75% chance of a June rate hike on Friday, although the Fed’s decline in asset purchases could also end in June.
October was also a brutal month for bonds globally and in Europe, yields continued to rise despite an attempt by the European Central Bank (ECB) to allay concerns about rate hikes.
“It doesn’t feel like the dust has fallen on the Bank of Canada and the ECB in the past two days, and next week will bring the RBA, the Fed and the Bank of England,” said the NatWest Markets analysts in a note to clients.
“No rest for the fatigue rate, at least until we’ve finished all these big political meetings, and of course next Friday’s report (on non-farm wages).”
(Reporting by Tom Westbrook; editing by Robert Birsel)