U.S. Treasury yields edged lower early Tuesday, providing a brief respite from the previous session's sharp decline, as traders assessed central bank responses to renewed inflation concerns.
The yield on the 10-year U.S. Treasury note, a key benchmark for government borrowing costs, fell by over 1 basis point early Tuesday to 4.6073%. The yield on the more politically sensitive 30-year Treasury note was last steady at 5.1428%. The yield on the 2-year Treasury note, which often moves in tandem with expectations for the Federal Reserve's short-term interest rate decisions, also declined by more than 2 basis points to 4.0695%. One basis point equals 0.01%, and yields move inversely to prices.
The U.S. bond market is taking a breather following Monday's surge in yields, which saw the 10-year yield briefly touch a 15-month high.
Concurrently, a Bank of America survey released Tuesday indicated that 62% of global fund managers polled expect the 30-year U.S. Treasury yield to reach 6%. That would mark its highest level since late 1999, representing an increase of approximately 86 basis points from current levels. In contrast, only 20% of respondents anticipate the 30-year yield will fall to 4%.
In European markets early Tuesday, the yield on Germany's 10-year government bond fell by over 1 basis point to 3.1471%. Despite some pullback, the UK's 10-year gilt yield remained above 5%, last at 5.115%. Long-term bond yields in both the UK and Germany are also elevated. On Tuesday, Germany's 30-year bond yield was at 3.6836%, while the UK's 30-year gilt yield rose by less than 1 basis point to 5.773%.
Mohit Kumar, Chief Economist & Strategist at Jefferies, noted that the prevailing sentiment in global bond markets is being driven by inflation impacts—primarily due to soaring energy costs—and concerns about fiscal deficits. In the UK, country-specific political turmoil is an additional factor. Kumar stated, "Even if we get a [Middle East] deal... oil prices are not going back to pre-war levels, and we expect them to be 25% to 30% higher six months from now."
The international oil benchmark, Brent crude, was last down 1.5% at $110.38 per barrel, while U.S. West Texas Intermediate crude was flat at $108.67.
The influence of deficits is another key factor. Kumar pointed out, "Governments are going to provide fuel subsidies to households, which means more borrowing, and that puts pressure on the long end of the yield curve." However, he also suggested that while markets are currently pricing in expectations for interest rate hikes, these expectations may be "irrational" as the magnitude of inflation increases could be offset by a corresponding decline in economic growth.
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