Treasury yields face major swings ahead as rates rise, but recession fears grow

Jun. 17, 2022 7:00 AM ETProShares UltraShort 20+ Year Treasury ETF (TBT), SHYBy: Kim Khan, SA News Editor1 Comment

Government bonds

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Treasury yields are stabilizing early Friday after seeing volatile moves this week.

The 10-year Treasury yield (NYSEARCA:TBT) (TLT) is up 1 basis point to 3.21%, while the 2-year yield (NASDAQ:SHY) is up 3 basis points to 3.14%.

Rates have seen whipsaw action as bond traders weigh a front-load Fed and global central bank tightening against the impact of higher rates on growth and some weaker data.

Yesterday was a perfect example of the push-and-pull circumstances, with the U.S. benchmark yield seeing a swing of 0.3 percentage points. As global yields rose following hikes by the Swiss National Bank and the Bank of England, the 10-year shot up nearly 21 basis points, but after weak housing data is ended down 9 basis point to 3.20%.

"The Fed’s messaging is likely to continue to be hawkish until we see clearer evidence of a deceleration in inflation," UBS CIO Mark Haefele wrote.

"Volatility in bond markets is likely to continue with each policy announcement and each new data on inflation and inflation expectations."

Where to next?

Banks are divided on yield direction through 2022.

"Our US rates strategists have updated their views in the face of some large forces in both directions with the 10yr now expected to hit 3.85%," Deutsche Bank's Jim Reid said. "They also updated their year-end 2yr call to 3.85%, so a flat curve."

"Although the Fed may not need to hike all the way to 4% in practice, the risk that it does so has increased, and with it the risk of a recession," Haefele said. "Taking this into account, we forecast 10-year US Treasury yields to trade at 3.25% by December and acknowledge they may trade even higher in the interim."

"We expect yields to decline more sustainably only in 2023 as inflation fears pass and as the market begins to consider the possibility of future rate cuts to support growth."

The "Fed has just shown that its policy path will react to inflation prints and there is no guarantee that the string of upside surprises will stop," ING said. "10Y Treasuries now have 3.5% firmly in their sights even if they might wait for the next inflation release to test that level."

"What’s more, other central banks are not as advanced in their tightening process and the risk of hawkish surprises from various parts of the world means yield will rise further still."

22V Research said recently that based on historical yield breaks the 10-year is on a path to 5%.

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