Bond Report: 10-year Treasury yield extends climb as earnings lift appetite for stocks

Long-dated Treasury yields early Thursday traded at the highest level in nearly a month, but shorter maturities saw a slight pullback in rates, as investors pored over corporate quarterly results and concerns about geopolitical tensions and tariffs subsided.

Looking ahead, bond investors are anticipating a series of data on employment and business conditions, which can help gauge the health of the economy and the pace at which the Federal Reserve will look to normalize interest rates.

How are Treasurys performing?

The benchmark 10-year Treasury note yield TMUBMUSD10Y, +0.87%  rose 2.6 basis points to 2.893%, after yields surged by the most in a day since Feb. 14 late Wednesday. The benchmark note was hanging around its highest yield level since March 21, according to FactSet data. The 2-year note yield TMUBMUSD02Y, -0.16%  shed 0.6 basis point at 2.423%, and has been hovering around highest level since 2008, with late-Wednesday trade also representing its largest daily yield climb in about nine weeks.

The spread between the two-year note yield and the 10-year note yield, a widely-watched measure of the yield curve, widened slightly to 47 percentage points.

Meanwhile, the 30-year bond yield TMUBMUSD30Y, +1.02% advanced 4.3 basis points to 3.090%, extending its rise after snapping a three-session yield decline in the prior session.

Bond prices move in the opposite direction of yields.

What’s driving the market

The continued flattening of the yield curve, or the difference between short- and long-dated Treasury yields, has been a white-hot focus for investors, intensifying over the past week.

However, Federal Reserve Gov. Randal Quarles late Wednesday said market participants, who fear that a flattening yield curve is an ominous signal about the long-term prospects for the economy or that it might portend a recession, are overplaying it.

Quarles argued that the yield curve is flattening because the Fed is hiking rates back to a natural rate after a period of ultraloose monetary policy, with the 2-year note yield, the most sensitive to such moves, rising the most and the benchmark 10-year rising at less brisk pace due to a number of other factors.

Because short-term yields have risen above long-term yields, or inverted, before each of the last seven recessions, the shape of the curve, which has yet to invert, will remain in focus.

Other members of the Fed, notably San Francisco President John Williams, who is expected to become head of the New York Federal Reserve in June, suggested during a Tuesday speech in Madrid that an inversion is a real possibility. St. Louis Fed President James Bullard also has deemed an inversion a potential sign of the economic growth outlook and sees it happening soon.

Market participants have largely enjoyed a three-session uptrend in risk assets as most corporate quarterly results have come in better than expected, that dynamic has underpinned a modest uptick in risk appetite, with the S&P 500 index SPX, +0.08% and the Nasdaq Composite Index COMP, +0.19% enjoying a three-session win streak (though equities were seeing muted action on Thursday), and diminished the appeal of assets perceived as havens like bonds.

What are market participants saying

“I’m not viewing the current flattening of the yield curve as a particular signal towards a pending recession,” Quarles said, during Wednesday’s speech at the Bretton Woods Conference.

“I think the flattening of the yield curve we are seeing now is more a result of expected lags in the adjustment of the longer-term rates once shorter-term rates start to rise. If that is what is driving things going forward I don’t think it is as likely that the inversion of the yield curve is…sort of an indicator of a recession to come,” Quarles said.

“The U.S. yield curve has been making headlines for some time, and the yield between 10 and 2-year Treasury bonds shrank to 41 basis points yesterday, the lowest since 2007. If the yield curve inverted within six months, as St. Louis Fed President James Bullard suggested, it will be an indication that a chance of a recession becomes very likely. This is happening at a time when global debt is at historic highs, according to the IMF. Total debt reached a record $164 trillion last year,” wrote Hussein Sayed, chief market strategist at FXTM, in a Thursday research note.

Which speakers and data are ahead?
  • Fed Gov. Lael Brainard was expected to speak on regulatory reform at a finance-industry forum in Washington, D.C., at 8 a.m.
  • Weekly jobless claims are due at 8:30 a.m. Eastern Time, with economists expecting 230,000 claims
  • An April reading of business conditions from the Philadelphia Federal Reserve is also slated for 8:30 a.m., and is expected to slip to 20.1 from 22.3
  • International Monetary Fund Managing Director Christine Lagarde is set to hold a news conference at 8:45 a.m. (she is also slated to appear on CNBC soon after her conference)
  • A report on leading indicators is due at 10 a.m.
  • Quarles is due to testify about regulatory reform before a Senate committee at 10 a.m.
  • Cleveland Fed President Loretta Mester is scheduled to give a speech on the economic outlook and policy at the University of Pittsburgh’s business school at 6:45 p.m.
  • Japan’s consumer-price index for March is due out at 7:30 p.m.
What other assets are in focus?

The 10-year German government bond yield TMBMKDE-10Y, +8.20%  rose 4.1 basis points to 0.563%, according to FactSet data. German sovereign paper is seen a proxy for the eurozone’s economy and the viability of the economic bloc.

Meanwhile, the Japanese 10-year government bond TMBMKJP-10Y, +13.46%  is at 0.037%, compared with 0.035% in the prior session.

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