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Bond Report: Treasurys sell off, lifting yields, as Fed dashes expectations for full percentage point hike

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Bond yields rose on Monday, as broader market risk appetite reduced demand for the perceived safety of sovereign debt.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
3.157%

slipped by less than 1 basis point to 3.012%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
2.958%

retreated 1.8 basis points to 2.984%.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.111%

fell 1.7 basis points to 3.172%.

The 10-year to 2-year spread of minus 19.5 basis points means the yield remains at its most inverted in 20 years, signaling a looming economic downturn.

What’s driving markets

The prospect of a less aggressive-than-feared Federal Reserve was not enough to entice buyers into treasuries as a more upbeat tone across markets reduced the attraction of government paper.

Markets are pricing in a 33% probability that the Fed will raise interest rates by another 100 basis points to a range of 2.50% to 2.75% after its meeting on 27th July.

But that is down sharply from the more than 90% probability registered last week, which came in the wake of a report showing U.S inflation running at 9.1% in June, a 41 year high.

The retreat reflects an effort over the past few days by Federal Reserve officials to talk down the prospect of a full percentage point hike.

The central bank is expected to take its borrowing costs to 3.4% by February 2023, according to Fed Funds futures.

The NAHB Housing Market Index is the only notable U.S. economic data release on Monday.

As a somewhat calmer tone returns to markets, traders are reducing bets on future choppiness. The ICE BoAML MOVE Index, a gauge of expected treasury volatility, is currently hovering at 129.9, down from the record high of near 160 touched earlier in the month.

In Europe, the yield on the German 10-year bund
TMBMKDE-10Y,
1.213%

was up 8 basis points to 1.202% and its Italian equivalent
TMBMKIT-10Y,
3.382%

added 10 basis points to 3.357%.

This takes the closely-watched German-Italian spread to 216 basis points ahead of the European Central Bank’s monetary policy decision on Thursday, and amid political turmoil in Rome.

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