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Bond Report: Treasury yields rise as traders monitor Russia-Ukraine battle, await knowledge

Treasury yields rose early Friday as investors continued to track developments in the Russia-Ukraine war and digested hawkish comments this week by Federal Reserve officials.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.363%
was at 2.361%, compared with 2.34% at 3 p.m. Eastern on Thursday. Yields and debt prices move opposite each other.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.166%
stood at 2.158% versus 2.122% Thursday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.513%
was at 2.528%, compared with 2.51% late Thursday.

What’s driving the market?

The Biden administration on Thursday rolled out more sanctions against Moscow in response to the Feb. 24 invasion of Ukraine. President Joe Biden called for kicking Russia out of the Group of 20 largest economies and warned that NATO would respond in some form if the country’s armed forces used chemical weapons in Ukraine.

Expectations the Federal Reserve will raise interest rates by 50 basis points, or half a percentage point, at its next policy meeting in May have grown this week. Fed Chairman Jerome Powell left the door open to a move larger than a quarter point in remarks Monday, a prospect echoed by some policy makers later in the week.

Fed-funds futures now reflect a 70.5% probability of a half-point rate increase in May, according to CME’s FedWatch tool, up from 43.9% a week ago and 33% month ago. The market reflects a 20.5% probability of a quarter-point increase.

Investors will hear from New York Fed President John Williams on Friday, along with San Francisco Fed President Mary Daly, who earlier this week said “everything is on the table” for the central bank’s May meeting, including a half percentage point rate rise and an announcement about the plan to shrink the Fed’s nearly $9 trillion balance sheet.

Richmond Fed President Tom Barkin is also due to speak about the economy Friday, while Fed Gov. Christopher Waller, who has previously called for half-point hikes, is slated to talk about digital currencies.

The University of Michigan’s final consumer sentiment index reading for March is due at 10 a.m., along with a reading on inflation expectations over the next five years. Data on February pending home sales is also set for release at 10 a.m.

What are analysts saying?

“For the time being, we regard the increase in nominal 10Y yields as largely exhausted as a substantial amount of monetary-policy tightening is fully priced in,” wrote analysts at UniCredit Bank, in a note. “In terms of curve shape, the (U.S. Treasury) curve is likely to continue to flatten, albeit gradually, since a 50bp hike in the target rate in early May is almost fully priced in now (according to fed funds future contracts).”

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