Bond Report: Bond yields rise after Russia resumes gas flows


U.S. Treasury yields rose on Thursday, as the resumption of gas flows to Europe through a crucial pipeline reduced concerns about a sharp economic slowdown on the continent.

What’s happening

The 10-year to 2-year spread of minus 19.2 basis points means the yield remains near its most inverted since the great financial crisis, potentially signaling a looming economic downturn.

What’s driving markets

Worries about a savage economic slowdown in Germany have receded after Russia resumed natural gas flows through the Nord Stream 1 pipeline on Thursday.

The International Monetary Fund had calculated that if the energy conduit was shut for a prolonged period it would hit industry and households, pushing the world’s fourth biggest economy into a sharp recession in 2023.

U.S. Treasury yields rose in line with German peers, with 10-year bunds TMBMKDE-10Y, 1.292% up 1.6 basis points to 1.275% as the market also waited to see by how much the European Central Bank would raise interest rates on Thursday. Such a move would mark the first rate hike in more than a decade.

Expectations for Federal Reserve policy were barely changed. Markets are pricing in a 64.4% probability that the Fed will raise interest rates by another 75 basis points to a range of 2.25% to 2.5% after its meeting on July 27th. The central bank is expected to take its borrowing costs to 3.6% by February 2023, according to Fed Funds futures.

See: How high will the Fed have to push up interest rates to cool down inflation? No one knows

U.S. economic data due on Thursday include jobless claims at 8:30 a.m. and leading indicators at 10 a.m., both Eastern.

Italian benchmark bond yields TMBMKIT-10Y, 3.573% jumped after Prime Minister Mario Draghi resigned in response to members of his governing coalition refusing to back him in a no-confidence vote.

The yield spread with Germany, a closely watched gauge of stress for Rome’s debt, jumped to 228 basis points, as doubts grew that Italy could fulfill conditions necessary to receive its €200 billion ($204 billion) share of the EU’s coronavirus recovery fund.

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