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Bond Report: 10- and 30-year Treasury yields post their longest winning streak in months amid growing inflation fears

Investors piled back into U.S. government debt on Wednesday, following a selloff on Tuesday sparked by inflation fears which pushed Treasury yields to the highest levels in months.

Wednesday’s moves were accompanied by the dollar’s rise to the highest level in almost a year as currency traders react to the Federal Reserve’s policy update from last week.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.528%

dropped to 1.510%, down from 1.534% at 3 p.m. Eastern on Tuesday. Tuesday’s level was the highest for the rate since June 25, based on 3 p.m. yields, according to Dow Jones Market Data.

The 2-year Treasury note yield
TMUBMUSD02Y,
0.304%

slipped to 0.289% versus 0.305% Tuesday afternoon. It’s still the highest yield since March 25, 2020.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.075%

was lower at 2.05%, compared with 2.07% on Tuesday. Tuesday’s level was the highest level since July 1, and the biggest one-day gain since June 21.

What’s driving the market?

Buyers returned to government debt on Wednesday morning, following the inflation-fueled selloff in the prior session that sent the 10-year rate above 1.5% and the 30-year above 2%.

Treasury yields had been rising since the middle of last week, when Federal Reserve policy makers indicated they could formally lay out a plan to begin tapering monthly bond purchases in November, and moved up their forecasts for subsequent interest-rate increases.

Investors have had a bit of a delayed reaction to the Federal Reserve’s policy update — with major stock indexes taking a hit earlier this week and the U.S. Dollar Index
DXY,
+0.67%

reaching its highest level on Wednesday since October 2020.

In the first of a number of Fed officials set to speak on Wednesday, Philadelphia Federal Reserve President Patrick Harker suggested that the first U.S. rate hike may come late next year or early 2023.

Fed Chairman Jerome Powell speaks to an ECB forum about central banking at 11:45 a.m. Eastern Time. The other speakers for the day are San Francisco Fed President Mary Daly, who gives a speech to UCLA Anderson Forecast around 1 p.m., and Atlanta Fed President Raphael Bostic, who talks at the Chicago Payments Symposium at 2 p.m.

In U.S. data releases on Wednesday, pending home sales in the U.S. jumped 8% in August.

What are analysts saying?

“Treasuries found a supporting bid overnight — an especially meaningful development in the wake of the recent selloff which has seen 10-year yields breach 1.55% on two occasions, marking the new peak for rates since mid-June,” strategists Ian Lyngen and Ben Jeffery at BMO Capital Markets wrote in a note Wednesday.

“Last week’s numerous central bank meetings across the world confirmed that the overall direction for global monetary policy is shifting in a more hawkish direction,” analysts at BCA Research said in a Wednesday note. “The main reason: growing fears that elevated inflation will persist for much longer than expected, even with global growth having lost some momentum.”

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