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Bond Report: Treasury yields fall further amid China COVID worries

Treasury yields fell Tuesday, extending a pullback from levels last seen more than three years ago as worries about COVID lockdowns in China and their impact on the global economy spark buying interest.

What’s driving the market?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.797%

fell to 2.789%, down from 2.825% at 3 p.m. Eastern on Monday.

The 2-year Treasury yield
TMUBMUSD02Y,
2.596%

was at 2.601%, down from 2.628% on Monday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
2.876%

was 2.866% versus 2.893% late Monday.

What’s driving the market?

Rising COVID-19 cases in Beijing stirred fears of a lockdown of China’s capital. The nation’s zero-COVID policy, which has resulted in mass lockdowns in Shanghai, the country’s largest city and a major economic hub, is seen weighing on growth in the world’s second-largest economy.

The People’s Bank of China on Tuesday said it would take steps to provide monetary policy support to the real economy, particularly small businesses and industries hit hard by the pandemic, news reports said.

Investors were also weighing expectations for aggressive interest rate increases by the Federal Reserve after Chairman Jerome Powell last week affirmed that an outsize half-percentage point increase in the fed funds rate is “on the table” when policy makers meet May 3-4 while also leaving the door open to further half-point moves, rather than the usual quarter-point increment, in subsequent meetings.

Investors will see data on U.S. March durable goods orders at 8:30 a.m. ET, while the February S&P Case-Shiller U.S. home price index and the February FHFA U.S. home price index are both due at 9 a.m. An April consumer-confidence reading is set for release at 10 a.m., as well as March new home sales.

Investors also noted remarks by Russian Foreign Minister Sergei Lavrov, who warned of the danger of nuclear confrontation as Western countries continue to funnel aid to Ukraine.

“I would not want to see these risks artificially inflated now, when the risks are rather significant,” Lavrov said in a Russian television interview, according to the Associated Press.

“The danger is serious,” he said. “It is real. It should not be underestimated.”

What do analysts say?

“The recovery attempt of risk appetites, reflected in the recovery and strong close in U.S. stocks yesterday was dealt a blow by Russia’s foreign minister’s warning of a ‘serious’ danger of nuclear conflict,” said Marc Chandler, chief market strategist at Bannockburn Global Forex, in a note.

“It’s still early days, but it could be that yesterday’s moves on bond markets was some profit taking on short positions with markets gradually keeping next week’s FOMC meeting in mind,” wrote analysts at KBC Bank in Brussels, referring to the Fed’s policy setting Federal Open Market Committee.

“The trend on bond markets has been very strong with an aggressive Fed tightening cycle discounted by now. Why not lock in some gains awaiting some fresh
guidance?” they wrote.

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