Bond Report: Bond yields slide as COVID restrictions return in China, reigniting global growth fears


Bond yields fell Monday on revived concerns about the prospects for the global economy after parts of China re-imposed COVID restrictions due to a new coronavirus variant.

What’s happening
  • The yield on the 2-year Treasury TMUBMUSD02Y, 3.090% slipped to 3.068% at 3 p.m. Eastern from 3.119% late Friday. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 2.994% retreated to 2.99% from 3.098% Friday afternoon.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.179% fell to 3.179% from 3.267% as of Friday.
What’s driving markets

A reduction in broader market risk appetite encouraged investors to seek government bonds. This follows news that China is battling a new COVID-19 strain, which has raised fears that the world’s second biggest economy will take another hit to growth. Almost 30 million people were reported to be under restrictions.

The U.S. 10-year to 2-year spread of minus 7.8 basis points left the yield curve inverted, potentially signaling a looming economic downturn.

Yields had crept higher toward the end of last week, helped by a stronger-than-expected U.S. jobs report for June, which bolstered expectations that the Federal Reserve can afford to keep hiking interest rates to damp down inflation.

Markets were pricing in a 94% probability that the Fed will raise interest rates by another 75 basis points to a range of 2.25% to 2.5% at its July 26-27 meeting, and a 5.8% chance of a 100-basis-point hike, according to the CME FedWatch Tool.

Key to these expectations will be the U.S. consumer prices inflation data released on Wednesday. The June CPI is forecast to rise year-over-year to 8.8% from 8.6% in May, but inflation-derivatives traders have been expecting to see a bit higher reading, of 8.9% for June, as well as a string of three more 8%-plus readings through September.

Read: ‘Inflation is going to be stickier than most people imagine’: Inside the obscure market where traders have been mostly right about price gains.

What analysts are saying

“We haven’t had a period of such huge misses in terms of inflation before, and economic forecasts being put out will be quite dated,” said John Madziyire, senior portfolio manager and head of U.S. Treasuries and inflation within Vanguard’s fixed-income group.

“There’s huge volatility and inability to forecast quite accurately so I’m following CPI fixings quite closely, which I get from our brokers on a daily basis. This has become one of the more significant inputs of information, given how live and real-time it is,” he told MarketWatch via phone. “My view is that we are closer to the peak when it comes to inflation, and the best-case scenario for the Fed is for inflation to start coming down.”

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