The yield on the benchmark 10-year Treasury note early Tuesday climbed to match its highest levels since 2011 after a strong retail sales number highlighted the economy’s steady momentum.
The yield advance comes amid resurgent worries that negotiations between the U.S. and China remain challenged, stoking fears that a potential trade clash could push prices and inflation higher—a negative for bonds.
How did Treasurys perform?
The 10-year Treasury note yield TMUBMUSD10Y, +1.87% jumped 6.1 basis points to 3.056%, the highest since June 2011, according to Tradeweb data.
The 30-year bond yield TMUBMUSD30Y, +1.67% added 5.6 basis points to 3.184%. The short-dated 2-year note yield TMUBMUSD02Y, +0.17% edged 2.1 basis point higher to 2.568%, extending a yield move at around a decade peak.
The yield spread between the 2-year and the 10-year rate stood at 47.1 basis points, holding near its narrowest levels in about a decade.
The yield curve is often tracked as a measure of sentiment about the economy’s overall health. In a normal environment, the yield curve steepens because investors tend to demand a higher yield for lending further into the future, while a flattening curve is sometimes read as a sign that investors are worried about the longer-term outlook.
Bond prices fall as yields rise.
What’s driving the bond market?
The threat of rising borrowing costs has given risk investors pause, with the benchmark 10-year note again testing a yield level above 3%, which has previously caused friction in markets, challenging investors appetite for assets perceived as risky against havens such as bonds. The climb in yields came on the back of strong retail sales figures for the last two months, indicating the economy still has enough momentum to grow at a steady pace.
Retail sales climbed 0.3% in April, while the March sales figures were revised to show an 0.8% increase. Traders now pay more attention to retail sales and average hourly earnings as clues to when record low unemployment rates will lead to inflationary pressures, according to JPMorgan Chase & Co. strategists.
See: Bond traders don’t care about nonfarm payrolls anymore, in one chart
Meanwhile, trade worries also played a part in hitting Treasurys, as reports on Tuesday indicated that the U.S. and China remain “very far apart” in resolving trade differences, according to U.S. Ambassador to China Terry Branstad. Trade tensions pose the threat of erupting into a full-fledged trade conflict, which can push prices and inflation higher, anathema for fixed-income assets, whose finite values are eroded by climbing prices.
U.S. Commerce Secretary Ross made similar comments about the state of trade talks between Beijing and Washington on Monday.
In Europe, yields ticked higher, after the German ZEW economic sentiment held at a negative 8.2 in May, missing forecasts of a negative 7.8 reading for the eurozone’s largest economy, and gross domestic product for the first quarter expanded 1.6% year-over-year, below forecasts of a 1.7% reading and down from 2.3% in the previous quarter.
On Monday, European debt rose amid heightening expectations that the European Central Bank will soon begin raising rates, joining the Fed. Bank of France Gov. Villeroy de Galhau, a member of the ECB’s governing council, said the end-date for its asset purchases was approaching.
Bond market investors may also watch the a Senate panel scheduled to hold a hearing on the nomination of Richard Clarida to become the Fed’s vice chairman, with Michelle Bowman set to become a member of the central bank’s board of governors.
What are strategists saying?
“As things stand, consumption growth is on track for a big rebound in the second quarter, which should push overall GDP growth up to more than 3% annualized. That will keep the Fed on track to raise rates again at its June meeting,” said Michael Pearce, senior U.S. economist for Capital Economics.
“Comments from the Bank of France Governor, François Villeroy de Galhau, that the European Central Bank will not delay exiting quantitative easing pushed yields on European bonds higher, promoting profit taking. Meanwhile, U.S. 10-year treasury yields are back above 3%, suggesting that investors will require more risk premium for holding equities,” wrote Hussein Sayed, chief market strategist at FXTM in a Tuesday research note.
“Unless growth offsets the rise in risk premium, equities will likely face some challenging times ahead. European stocks are set to open lower and U.S. futures are also indicating a lower open,” he said
What data area ahead
- The Empire State manufacturing index rose in May to 20.1 from 15.8 in April. Any reading above zero indicates improving conditions.
- Home-builder confidence in the market for newly-built single-family homes rose two points to a level of 70 in May, according to the National Association of Home Builders/Wells Fargo housing market index. The Econoday-compiled consensus was for a 69 reading
- Business inventories-to-sales ratio slipped to 1.34 in March from 1.35
Check out: MarketWatch’s Economic Calendar
And see: Inflation pause lends helping hand to borrowers
Fed speakers in focus
San Francisco Fed President John Williams is slated to give a speech to the Economic Club of Minnesota at 1:10 p.m.
What other assets are investors watching
The 10-year German bond TMBMKDE-10Y, +4.89% known as the bund, was yielding 0.641%, according to Tradeweb data. The German bond is often used as a proxy for the health of the eurozone. Equity markets in the U.S. were poised to pull back as bond rates rose, with the Dow Jones Industrial Average DJIA, -0.70% and the S&P 500 index SPX, -0.66% set to fall at the open of regular trade.