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Bond Report: Treasury yields fall further as recession fears rise

Treasury yields fell further Thursday morning, extending a pullback from multi-year highs on fears aggressive central bank monetary tightening in the face of persistent inflation could tilt the economy into recession.

What yields are doing

The yield on the 10-year Treasury note was at 3.118%, down from 3.155% at 3 p.m. Eastern on Wednesday.

The 2-year Treasury yield
TMUBMUSD02Y,
3.031%

was 3.015%, compared with 3.056% Wednesday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.215%

declined to 3.203% versus 3.241% late Wednesday.

What’s driving the market

Treasury yields rose sharply earlier in 2022 in response to surging U.S. inflation, which prompted the Federal Reserve to raise its benchmark interest rate quickly. The Fed last week hiked the fed-funds rate by 75 basis points, or three-quarter of a percentage point — its largest rise since 1994 — after a half-point hike in May and a quarter-point rise in March. The Fed has also started shrinking its balance sheet.

But the increasingly aggressive Fed — and moves by other major central banks — have stirred fears that policy tightening could push the economy into recession. Federal Reserve Chair Jerome Powell, in testimony before the U.S. Senate Banking Committee on Wednesday, argued that the U.S. economy was robust enough to handle the Fed’s tightening efforts, but acknowledged that a recession was a possibility.

Investors were also keeping an eye on oil futures
CL.1,
-0.63%
,
which have retreated sharply from three-month highs, a decline that if sustained would provide some comfort on worries about headline inflation.

Powell will appear before the House Financial Services Committee on Thursday morning, wrapping up semiannual congressional testimony on monetary policy.

Weekly data on U.S. jobless claims is scheduled for 8:30 a.m. ET with first-time applications for unemployment benefits expected to fall to 225,000 in the week ended June 18 from 229,000 the previous week. First-quarter current-account figures are also due at 8:30 a.m.

S&P Global will release June “flash” readings of its U.S. manufacturing and services purchasing managers indexes at 9:45 a.m.

What analysts say

Powell “is unlikely to deviate from the comments he made yesterday to the Senate Banking Committee,” wrote economists at UniCredit Bank, in a note. “Yesterday, Mr. Powell maintained the hawkish tone from the FOMC press conference last week. He acknowledged that it would be ‘very challenging’ to achieve a soft landing for the economy, but he said, ‘we have to get back to 2% inflation’ otherwise the risk is that ‘we would allow this high inflation to get entrenched in the economy.’

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