Bond Report: U.S. 10-year yield rises to within sniffing distance of 3%

The yield on 10-year U.S. notes continued to rise on Monday, taking a stab at the psychologically important 3% level as strengthening inflation prospects added to expectations of a more hawkish approach from the Federal Reserve.

What are Treasurys doing?

The benchmark 10-year Treasury note yield TMUBMUSD10Y, +0.82%  picked up 3.9 basis points to 2.9916%, its highest level since January 2014, according to FactSet data.

The 2-year note yield TMUBMUSD02Y, +1.38%  gained 2.5 basis points to 2.4743%, while the interest rate on the 30-year bond TMUBMUSD30Y, +0.66%  rose 3.4 basis points to 3.1732%.

What’s driving the market?

U.S. yields started to head higher last week after a flurry a Fed speakers rekindled the idea that the central bank could raise interest rates four times in 2018 and not the three times the rate setters have previously indicated. On Friday, traders on the fed-fund futures market saw a 38% chance of a total of four hikes this year, compared with 24.5% on April. 11.

Rising inflation expectations have also added to the notion that rates may have to go up quicker than previously forecast. The outlook for higher consumer prices was partly spurred by a rally in oil and metals prices, which usually lifts headline inflation data.

What are strategists saying?

“One of the main themes over the last week or so has been the revival of the rising inflation/rising yield story. Oil prices have been rising recently (the highest since December 2014) and now metal prices are rising too as the U.S. sanctions on Russia threaten to disrupt global supplies of aluminum and other industrial metals,” said Marshall Gittler, chief strategist at ACLS Global, in a note.

“Bond yields in Europe and the U.S. shot up, possibly in reaction, and U.S. 10-year yields are closing in on 3% again. The probability of four rate hikes in the U.S. this year hit the highest level of the year, while the probability of only one or two hikes continues to fall,” he added.

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