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Bond Report: 2- and 10-year Treasury yields extend decline as nervous investors flock to bonds

Yields on 2- and 10-year Treasurys had their biggest two-day drops in three months as of Thursday, as investors flocked to government bonds and U.S. stocks buckled under the Federal Reserve’s biggest interest rate hike in 28 years.

What yields did

The 2-year Treasury note yield BX:TMUBMUSD02Y declined 11.7 basis points to 3.158% from 3.275% Wednesday afternoon.

The yield on the 10-year Treasury note

dropped 8.6 basis points to 3.303% from 3.389% at 3 p.m. Eastern on Wednesday.

The 2-year rate is down 27.7 basis points, while the 10-year rate is down 17.9 basis points, over the last two trading days. Those are the largest two-day declines since March 1, based on 3 p.m. levels, according to Dow Jones Market Data.

The yield on the 30-year Treasury bond

declined 4.5 basis points to 3.359% from 3.404% late Wednesday. That’s the largest one-day decline since June 7.

What drove the market

Investors returned to buying government bonds as U.S. stocks broadly sold off on Thursday, a day after the Fed raised its benchmark interest rate by 75 basis points, or three-quarters of a percentage point, in its largest hike since November 1994. Dow industrials

were down more than 700 points in the final minutes of trading, while the S&P 500

and Nasdaq Composite

were each lower by 3.2% and 4.1%, respectively.

In his post-meeting press conference on Wednesday, Fed Chairman Jerome Powell said a 75 or 50 basis point move is likely in July, but that 75 basis point moves aren’t likely to become the norm.

Powell also said it wasn’t the Fed’s intention to cause a recession, but warned that the path to a so-called soft landing for the economy was becoming more difficult due to factors over which central banks have little control, such as the impact of the war in Ukraine on commodity prices.

“Many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not,” he said.

Read: Transcript: Fed Chief Powell’s Postmeeting Press Conference

See also: As Fed aggressively raises rates, here are 4 takeaways from Jerome Powell’s press conference

Indeed, traders of so-called fixings, or derivatives-like instruments related to Treasury inflation-protected securities, expect four straight months of annual headline consumer-price index readings at roughly 9% or higher from June through September. Fixings traders said the Fed’s rate hike and policy update made no difference to them.

In the wake of the Fed’s move, U.S. stocks had initially rallied on Wednesday, with the Dow Jones Industrial Average

and S&P 500

snapping a bruising five-day losing streak. By Thursday, though, equities were back under pressure and recession fears were driving many investors into government bonds.

Other central banks are also tightening monetary policy to combat inflation. The Swiss National Bank lifted its base rate by a half point, to negative 0.25%, while the Bank of England delivered a quarter-point hike on Thursday.

In addition, following an emergency meeting on Wednesday, the European Central Bank said it would use proceeds from expiring bonds it purchased under its former pandemic emergency purchase program, or PEPP, to help keep the yields of so-called peripheral countries from spiraling higher.

Read: Why the ECB called an emergency meeting as it wrestles with ‘fragmentation’ risk

In U.S. economic data Thursday, construction started on new U.S. homes fell 14.4% in May, the Commerce Department said Thursday. The annual rate of total housing starts fell to 1.55 million last month from a revised 1.81 million in April. Economists polled by The Wall Street Journal had expected housing starts to fall to a 1.68 million rate from April’s initial estimate of 1.72 million.

The Federal Reserve Bank of Philadelphia said its gauge of regional business activity fell to minus 3.3 in June from 2.6 in the prior month, signaling the first contraction in factory activity since May 2020. And new filings for unemployment benefits fell by 3,000 last week to 229,000, but they remained close to a five-month high, possibly offering a sign that layoffs have ticked up from record-low levels.

What analysts say

“Central bankers are now faced with the no-win scenario of pushing nominal policy rates higher to chase soaring inflation in a bid to maintain inflation fighting credibility, regardless of the spillover effects on financial market stability or economic growth expectations,” according to a note from BCA Research.

” ‘Overtightening’ monetary policy is a growing risk, especially in Europe where the neutral interest rate remains much lower than in the U.S.,” they said.

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