Treasury 2-yr yields head for 4%

TREASURY 2-year yields are poised to crack above 4 percent for the first time since 2007, lifted by the Federal Reserve’s steepest tightening cycle in a generation. The yield on the benchmark short-end note rose as much as 5 basis points to 3.99 percent on Tuesday, up more than 3 percentage points this year as it heads for the biggest annual increase since 1994.

The Fed will hike its benchmark interest rate by three-quarters of a point on Wednesday for a third consecutive meeting, according to the median estimate in a Bloomberg survey of economists. Two of the 96 analysts surveyed are predicting a full-point move.

“We are seeing clear signs that central banks are not about to ‘blink’ and are prepared to tolerate recession, if that is the price they need to pay to bring inflation under control, and this means higher short-end yields, globally,” said Andrew Ticehurst, a rates strategist at Nomura Inc. in Sydney.

Treasuries have sold off almost without pause since stronger-than-expected US inflation data last week dashed speculation that cost pressures had peaked. As Fed Chair Jerome Powell has signaled his commitment to quashing inflation, two-year notes—the most sensitive to policy moves—have led declines.

European bonds retreat

LOSSES swept across European markets as well, with traders ratcheting up bets on ECB rate hikes.

Bund yields rose 9 basis points to 1.90 percent while Italian 10-year yields increased 8 basis points to 4.16 percent, the highest since 2013.

UK 2-year yields added 15 basis points to 3.29 percent. Traders are betting the Bank of England will deliver two outsized increases by the end of the year.

In the US, real yields were also higher. The 10-year inflation-protected Treasury yield rose as much as four basis points to 1.18 percent on Tuesday. Investors of TIPS receive additional income to offset increases in consumer prices.

“I’m a short-term bear on Treasuries –- I think yields will head higher across the curve until the Fed stops hiking,” said Vimal Gor, Trovio Group’s chief investment officer. “Then way before they start cutting rates I think you’ll see a material rally in bonds. After years of people ignoring government bonds, they’re becoming more relevant again now.”

The spread between US two-year and 10-year notes swelled to as much as 48 basis points. The difference had reached 58 basis points on Aug. 10, the deepest inversion since the 1980s.

During that era, then Fed Chair Paul Volcker raised rates to as high as 20 percent to tame inflation. Powell evoked Volcker’s memory at last month’s Jackson Hole symposium as an example of the sort of determination that may be needed to rescue the economy from rampant price pressures.