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Bond Report: Treasury yields fall further, with 10-year rate below 2.8%, amid China COVID worries

Treasury yields fell across the board on 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 sparked buying interest.

What’s driving the market?
  • The yield on the 10-year Treasury note TMUBMUSD10Y, 2.737% fell to 2.764%, down from 2.825% at 3 p.m. Eastern on Monday.
  • The 2-year Treasury yield TMUBMUSD02Y, 2.542% was at 2.517%, down from 2.628% on Monday afternoon.
  • The 30-year Treasury bond yield TMUBMUSD30Y, 2.834% was 2.864% 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.

On Tuesday, the People’s Bank of China 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 affirmed last week that an outsized half-percentage point increase in the fed funds rate is “on the table” when policy makers meet May 3-4. He also left the door open to further half-point moves, rather than the usual quarter-point increment, in subsequent meetings.

Data showed that U.S. March durable goods orders snapped back in March, rising 0.8% and matching the estimate of economists polled by the Wall Street Journal. Meanwhile, home prices rose at a breakneck pace in February, with the S&P CoreLogic Case-Shiller 20-city price index posting a 20.2% year-over-year gain. New home sales fell 8.6% in March to a 763,000 annual rate, while the U.S. consumer confidence index slipped to 107.3 in April from 107.6, below forecast.

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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