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Bond Report: 10-year Treasury yield hits highest level since 2019 as it marches toward 2%

Treasury yields marched to multiyear highs on Tuesday, with the 10-year rate climbing to levels not seen since July 2019 and some analysts predicting it may soon hit 2%.

What are yields doing?

The rate on the 10-year Treasury note TMUBMUSD10Y, 1.963% rose 3.9 basis points to 1.954%, up from 1.915% at 3 p.m. Eastern Time on Monday. It’s the highest level since July 31, 2019.
The yield on the 2-year Treasury note TMUBMUSD02Y, 1.349% climbed 4.5 basis points to 1.339% from 1.294% a day ago. That’s the highest since Feb. 21, 2020.
The spread, or differential, between the 2-year and 10-year Treasurys, a popular measure of the yield curve, stands at 61 basis points.
The 30-year Treasury bond TMUBMUSD30Y, 2.260% yield rose 3.3 basis points to 2.250%, up from 2.217% Monday afternoon. The yield has been up five of the past seven trading days.

What’s driving the market?

Yields are back on the rise, with markets now pricing in an almost one-in-three chance that the Federal Reserve will hike its benchmark interest rates by a full 50 basis points in March, and the benchmark 10-year Treasury note, used to price everything from car loans to mortgages, looks destined to hit 2% soon.

Analysts at Bank of America predict that the Fed could deliver 25 basis-point rate increases at each of the seven remaining policy meetings in 2022, starting in March. The bank also sees four more such rate hikes in 2023.

In data released Tuesday, the U.S. trade deficit jumped 27% in 2021 to a record $859 billion largely because the recovering economy gave Americans the means to buy more imports.

A $50 billion auction of 3-year notes TMUBMUSD03Y, 1.579% produced a record-low dealer takedown and record-high indirects, but was “not as good as it sounds,” according to Jefferies economists Thomas Simons and Aneta Markowska.

What are strategists saying?

Given the potential for the 10-year yield to move into 2% territory, “all else being equal the path of least resistance is for a round trip (perhaps over the course of several trading sessions) in which the repricing reaches the milestone of inspiring major dip buying interest,” wrote Ian Lyngen and Ben Jeffery, BMO Capital Markets strategists, in a Tuesday note.

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