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Bond Report: Treasury yields fall as Ukraine fears stoke ‘flight to safety’

Treasury yields fell Friday as the U.S. warned that a Russian invasion of Ukraine could occur in the coming days, sparking demand for assets perceived as safe.

The 2-year Treasury yield still posted its biggest weekly gain since October 2019, despite the Friday retreat, helped by a broad-based bond selloff in the prior session that was triggered by a hotter-than-expected January inflation reading.

What did yields do?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.925%

fell 7.7 basis points to 1.951%, from 2.028% at 3 p.m. Eastern Thursday, for the largest one-day decline since Jan. 21. It rose 2.1 basis points this week.

The 2-year Treasury note yield
TMUBMUSD02Y,
1.503%

fell 4.6 basis points to 1.514%, from 1.56% Thursday. For the week, it climbed 19.2 basis points, the largest weekly gain since the period that ended Oct. 11, 2019, based on 3 p.m. levels, according to Dow Jones Market Data.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.238%

dropped around 5 basis points to 2.254% versus 2.308% late Thursday. That’s the largest one-day decline since Jan. 27. The long bond’s rate rose 2.2 basis points this week.

The spread between 10-year and 2-year Treasury notes flattened below 45 basis points.

What drove the market?

White House National Security Adviser Jake Sullivan told reporters that a Russian invasion of Ukraine could come “any day now.” While the U.S. hadn’t determined whether Russian President Vladimir Putin had made a final decision, Sullivan urged Americans in Ukraine to leave the country within 48 hours and said

Some Fed watchers now suggest that an intermeeting rate hike wouldn’t surprise them. Meanwhile, economists at Citi said their base case is for a 50 basis point hike in March followed by quarter point hikes in May, June, September and December.

Read: A ‘firestorm’ of hawkish Fed speculation erupts following strong U.S. inflation reading

Friday’s market action came after the January consumer-price index, released on Thursday, showed the annual headline rate rising to a higher-than-expected 7.5%, its hottest reading since February 1982. Adding fuel to the fire was St. Louis Federal Reserve Bank President James Bullard, a voting member this year of the central bank’s rate-setting Federal Open Market Committee, who told Bloomberg News on Thursday that he would like to see the Fed raise rates by 100 basis points, or 1 percentage point, over its next three meetings.

Also see: DoubleLine Capital’s Gundlach sees Fed raising rates by more than the market expects

Two nonvoting Fed speakers played down the prospect of a half-point hike. Richmond Fed President Tom Barkin said on Thursday that he was open to the concept, but questioned whether there was a “screaming need” to do it. “I’d have to be convinced on that,” he said at an event, according to Reuters. San Francisco Fed President Mary Daly was quoted as telling Market News International that a half-point move wasn’t her preference.

In data releases Friday, the University of Michigan’s consumer sentiment reading fell to a decade-low of 61.7 in February from 67.2 the prior month, and five-year inflation expectations held steady at 3.1%.

What are analysts saying?

As fears of a Russian invasion of Ukraine rise, the “flight to safety is on, as long end Treasury yields fall, gold rises, and the dollar spikes,” said Cliff Hodge, chief investment officer for Cornerstone Wealth, in emailed comments.

“The logical response after the constant flows of the last two weeks would be to slow trading early next week,” said Jim Vogel, executive vice president at FHN Financial in Memphis. “The problem is there’s little pause before digesting PPI” or the producer-price index report “on Tuesday, retail sales Wednesday, and Fed speakers all through the week. Also, macro traders may scramble to realign positions before Presidents Day weekend.”

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