Five-Year Yields Rise to 2020 High on Hawkish Central Banks

(Bloomberg) -- Treasuries fell, sending five-year yields to a 19-month high, as traders braced for a testing week of heavy bond auctions and continued to digest the prospect that central banks in the U.S. and Europe will step up the pace of policy tightening.

The yield on five-year Treasuries reached 0.99%, the highest since February 2020, while 10-year yields briefly hit 1.51%, a level last seen in June. The five-year yield has climbed 15 basis points over the past week as the Federal Reserve signaled it may start reducing its asset purchases in November and raising rates as soon as next year. 

Treasuries held their losses after sales of a combined $121 billion in two-year and five-year notes gave mixed signals for investor demand. A $62 billion seven-year auction is due Tuesday. 

Bond yields increased across the globe last week as central banks move to reduce pandemic stimulus. The Bank of England surprised markets by raising the prospect of increasing rates as soon as November, and Norway delivered the first post-crisis hike among Group-of-10 countries. In the U.S., traders pulled forward wagers on an interest-rate increase as soon as in September 2022 following last week’s Fed meeting. 

“All of the factors that were keeping yields lower in the second quarter and for part of third quarter are now starting to run in reverse,” Jim Caron, a money manager at Morgan Stanley Investment Management, said in an interview on Bloomberg TV. “It’s even possible that you could start to even test 2% by end of this year or beginning of next year.” 

Bond investors are also on edge as an escalating power crunch across Europe and China threatens to put upward pressure on energy prices globally. West Texas Intermediate crude rose above $75 a barrel for the first time since July. 

Inflation concerns driving a further bond selloff will be a “longer-term theme” for markets, said Kit Juckes, a strategist at Societe Generale. “Momentum is with the bond bears and higher oil prices alone could be enough to keep the move going.”

The yield increase Monday was more pronounced in the middle of the yield curve, narrowing the difference between the five-year and 30-year Treasuries by about 2 basis points to 102 basis points. Yields on 30-year Treasuries erased most of their rise Monday to settle at about 2%.

Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments, said five- to seven-year part of the curve has adjusted high enough to reflect a hawkish Fed, while the long-end has more room to rise and converge to the central bank’s long-term rate projection of 2.5% in its dot-plot. 

“It’s that longer end of the curve where we’re a little bit more nervous,” he said on Bloomberg TV . “If there’s an anchor or a force of gravity out there, it’s relating the 30-year yield to the Fed’s long-run dot.”

Among the Fed speakers Monday, New York Fed President John Williams said moderating bond purchases may be warranted soon but policy makers need to be patient as it’s still “a long way” to go before reaching maximum employment. Fed Governor Lael Brainard said the labor market may soon meet her yardstick for scaling back asset purchases, and the Covid-19 delta variant could raise upside risks for inflation amid supply constraints.

On Tuesday, Fed Chair Jerome Powell will join Treasury Secretary Janet Yellen in addressing the “CARES Act Oversight of the Treasury and Federal Reserve.” The two will also appear before the House Financial Services Committee for a hearing on their pandemic response on Thursday.

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