U.S. Treasury yields plunge as market prices lower inflation


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NEW YORK — U.S. Treasury yields tumbled on

Friday and the benchmark 10-year note fell the most since

COVID-19 roiled markets in March 2020, as investors priced in

the likelihood the Federal Reserve will force inflation down to

near its target rate.

The breakeven rate on longer-dated inflation-protected

bonds, which measures the difference with the yield on nominal

Treasury debt, fell to nine-month lows.

The yield on 10-year notes tumbled 23.3 basis

points from the open to the session’s lowest point, before

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paring the decline, to be down 7.4 basis points at 2.900%.

The two-year yield, which typically moves in step

with interest rate expectations, slid 8.4 basis points to

2.843%. Both the two-year and 10-year yields were at roughly

four-week lows.

The breakeven rates on five- and 10-year Treasury

Inflation-Protected Securities, or TIPS, slid to 2.634% and

2.361%, respectively, a level last seen in September 2021.

“The breakeven market, the difference between TIPS versus

regular Treasuries, is dramatically downward sloping. It’s

barely above the Fed’s long-term average (inflation) target of

2%,” said Nancy Davis, managing partner and chief investment

officer at Quadratic Capital Management LLC in Greenwich,

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Connecticut.

“The market is pricing that the Fed’s hiking rates is going

to dramatically bring down future CPI inflation,” she said.

Uncertainty about when inflation will peak and how deep and

long a potential recession will be is driving all security

markets, whether credit or equities, said Dec Mullarkey,

managing director of investment strategy and asset allocation at

SLC Management in Boston.

“Central banks are saying the biggest threat out there is

inflation and we’re going do whatever it takes to get that under

control,” Mullarkey said. “That’s the message that the markets

have priced into their securities. They’re saying, ‘There’s a

lot of risk, there’s a lot of volatility.’”

The gap between yields on two- and 10-year Treasury notes

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, seen as an indicator of a potential recession when

the short end of the yield curve inverts and rises above the

long end, was at 5.6 basis points.

The U.S. dollar 5 years forward inflation-linked swap

, seen by some as a better gauge of inflation

expectations due to possible distortions caused by the Fed’s

quantitative easing, was last at 2.364%.

July 1 Friday 1:12 PM New York / 1712 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 1.68 1.7102 0.010

Six-month bills 2.4475 2.5117 0.007

Two-year note 100-78/256 2.841 -0.086

Three-year note 100-6/256 2.8663 -0.114

Five-year note 101-166/256 2.8926 -0.111

Seven-year note 101-248/256 2.9362 -0.094

10-year note 99-204/256 2.8986 -0.075

20-year bond 98-36/256 3.3791 0.000

30-year bond 95-24/256 3.1289 0.007

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 29.50 -1.50

spread

U.S. 3-year dollar swap 11.00 -1.50

spread

U.S. 5-year dollar swap 3.00 0.00

spread

U.S. 10-year dollar swap 7.50 0.25

spread

U.S. 30-year dollar swap -24.00 -0.50

spread

(Reporting by Herbert Lash

Editing by Marguerita Choy and Leslie Adler)

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