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An aggressive rally in Treasurys continued unabated on Tuesday, giving the 10-year yield its biggest two-day drop since March 2020, as Russia’s invasion of Ukraine went on for a sixth day.
Meanwhile, the 2-year Treasury rate had its biggest two-day decline since October 2008.
What are yields doing?
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The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.729%
declined 12.8 basis points to 1.708% from 1.836% at 3 p.m. Eastern on Monday. That’s the lowest since Jan. 13. The rate is down 27.6 basis points over the last two trading days, its largest two-day decline since March 23, 2020, based on 3 p.m. levels, according to Dow Jones Market Data. - The 2-year Treasury yield fell 12.3 basis points to 1.303% versus 1.426% on Monday afternoon. It’s down 28.1 basis points this week for the largest two-day decline since Oct. 2, 2008.
- The rate on the 30-year Treasury bond declined 7.5 basis points to 2.104% from 2.179% on Monday. That’s down 19 basis points over the last two trading days, the largest two-day decline since Nov. 26 of last year.
What’s driving the market?
Russia’s invasion of Ukraine has roiled global financial markets, stoking demand for safe-haven assets and raising uncertainty about the global economic outlook.
Shelling by Russian forces again pounded civilian targets in Kharkiv, Ukraine’s second-largest city, on Tuesday as satellite images showed a 40-mile convoy of Russian tanks and other military vehicles advancing on Kyiv, the capital. Russia’s Defense Ministry said it would strike Ukrainian intelligence and communications facilities in central Kyiv.
Read: Russia Targets Ukrainian Civilian Areas in Tactical Shift
The U.S. and other Western nations hit Russia with additional sanctions over the weekend and on Monday, effectively removing more Russian banks from the SWIFT interbank messaging system and taking aim at the country’s central bank in a move seen as hampering its ability to access its large stockpile of currency reserves. The ruble
USDRUB,
dropped further Tuesday, adding to its record plunge the prior day.
Read: Sanctions take aim at Russia’s economy: Here’s who is most exposed
Investors are weighing the implications of the invasion on the outlook for inflation and global growth, as well as how central banks, particularly the Federal Reserve, will respond. Commodity prices have surged in the wake of the invasion and sanctions, with Brent crude
BRN00,
the global oil benchmark, trading above $105 a barrel on Tuesday. And signs of stress are emerging across the U.S. rates market.
Uncertainty about the economic outlook has prompted traders to less aggressively price in big rate increases by the Federal Reserve and other major central banks. Rate futures were pricing in zero chance the Fed would hike interest rates by a half-point this month. That’s down from 41% a week ago, according to probabilities derived in the CME FedWatch tool. The market is now pricing in a 96% chance of a quarter-point increase and 4% chance of no change.
In data releases, the final reading of IHS Markit’s manufacturing purchasing managers index came in at 57.3 in February versus an initial 57.5 reading. The Institute for Supply Management’s manufacturing index rose to 58.6% in February from 57.6% previously and the prices paid index slipped to 75.6% from 76.1%.
President Joe Biden will deliver his State of the Union address on Tuesday night.
Employment data will also roll in this week, culminating in the Friday release of the official February jobs report. Federal Reserve Chairman Jerome Powell is slated to testify before a House panel on Wednesday and a Senate committee on Thursday.
What are analysts saying?
- “The dramatic adjustment to interest rate expectations continues. The market has now nearly fully rejected a 50 [basis point] hike” by the Fed, the Bank of England and the Bank of Canada, said Marc Chandler, chief market strategist at Bannockburn Global Forex, in a note.
- “While the war in Ukraine has finally triggered a big drop in developed market sovereign bond yields today, we think the likely inflationary impact of the war limits the scope for a sustained rally in DM bonds, especially outside the euro-zone,” Capital Economics markets economist Franziska Palmas wrote in a note.
