Treasuries tumbled anew Friday, sending the benchmark 10-year yield beyond the closely watched 1.6% mark to its highest level in more than a year. Expectations for inflation over the next decade lurched to a seven-year high.
Yields on the U.S. benchmark rose as much as 10 basis points to reach 1.637% in U.S. morning trading, a level unseen since February 2020. Rates leaped across notes and bonds, with the biggest moves in 10- and 20-year securities, steepening the so-called yield curve. The 10-year rate has failed to close above 1.60% since early 2020, though has surpassed that level in volatile intraday trading several times in recent weeks.
“From a macro perspective, around the 1.60% level is when equities start turning expensive versus rates on a risk premium basis,” said Mohit Kumar, managing director at Jefferies International.
The breakeven rate on 10-year notes, a measure of market expectations for annual consumer-price gains based on the yield gap to inflation-linked debt, topped 2.30% in early New York trading Friday, a level it hasn’t breached since early 2014. An equivalent measure for the five-year note touched its strongest level since 2008.
The move in global debt started in Australia, where bond futures fell heading into the market’s close to put modest pressure on Treasuries. At around the same time, there was a block sale of 10-year ultra bond futures, followed by a buyer of downside put options -- the hedging of which tends to weigh on the market. The three combined to tip 10-year Treasury futures through Thursday’s session low, which unleashed a wave of selling.
As many as 20,000 contracts changed hands in the next five minutes, the largest activity of the day to that point. The speed and severity of the move left many traders perplexed, with volumes in the cash market comparatively modest.
The moves there were most pronounced in some of the longer tenor securities, with the yield curve steepening as two-year rates rose less than two basis points. The front end of dollar funding markets has remained relatively anchored of late with a flood of dollars and supply-demand imbalances in various money markets exerting downward pressure on rates, and even driving levels on repurchase agreements below zero.
With Friday’s sudden spike, Treasury yields now exceeded levels seen after the disastrous seven-year U.S. bond auction from Feb. 25. Markets had been looking for a period of calm after the relatively uneventful passage of this week’s debt auctions, with focus switching to